ACC1701: Accounting for Decision Makers - 4) The Accounting Cycle: Adjusting Accounts & Completing the Cycle
4-1: Adjusting Entries
Adjusting journal entries to make sure that P/L shows accurate periodical expense and revenue based on accrual accounting.
Expense adjusting:
Prepaid Expenses
Revenue adjusting:
Unearned revenue
Other adjusting:
Depreciation Expense(減価償却) - the reduction in the value of a non-current asset due to the passage of time (wear and tear of the asset)
Interest Expense for current accounting year
Unpaid Salary Expense
Allowance for Doubtful Debts
4-2: Periodic Reporting and Accrual Accounting
Periodic Reporting
Calendar Year: Jan 1 to Dec 31
Fiscal Year: 12 consecutive months ending any date
For Timeliness - the report provides timely information
The accounting system prepares reports at regular intervals to show fair and comparable information to external stakeholders
Accrual Accounting
Recognizes events when the main economic impact is made for sake of informing accurate profit to external stakeholders
Accrual record revenues and expenses as they are earned and incurred, regardless of when cash is received/ paid
Cash-Basis has a 'time-period problem'
4-3: Revenue Recognition Principle (収益認識基準)
The 4 criteria of revenue recognition
Goods have been delivered, or services performed
The seller's price to the buyer is fixed or determinable
Persuasive evidence of a payment arrangement exists
Payment is realized or realizable (ie collectability is reasonably assured)
The recognition principle does not care whether or not cash is received
4-4: Matching Principle(収益費用対応の原則)
The 4 criteria of expense recognition
Expenses should be matched with the revenues they generate
If they cannot be matched, then they are recognized in the period they occur
Expenses are recognized in the period over which they generate economic benefits, regardless of when cash is paid
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