Adjusting entries 2

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<ul><li> 1. Accounting Principles Adjusting Entries: Accruals </li> <li> 2. REVENUE RECOGNITION PRINCIPLEThe revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned.In a service business, revenue is considered to be earned at the time the service is performed. </li> <li> 3. THE MATCHING PRINCIPLE The practice of expense recognition is referred to as the matching principle. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues).Revenues expenses earned are offset incurred inthis month against.... earning the revenue </li> <li> 4. STUDY OBJECTIVEIdentify the major types of adjusting entries.Identify the major types of adjusting entries. </li> <li> 5. ADJUSTING ENTRIESAdjusting entries are required each time financial statements are prepared.Adjusting entries can be classified as 1 prepayments (prepaid expenses or unearned revenues) OR 2 accruals (accrued revenues or accrued expenses) </li> <li> 6. TYPES OF ADJUSTING ENTRIESPrepayments1 Prepaid Expenses Expenses paid in cash and recorded as assets before they are used or consumed2 Unearned Revenues cash received and recorded as liabilities before revenue is earned </li> <li> 7. TYPES OF ADJUSTING ENTRIESAccruals1 Accrued Revenues Revenues earned but not yet received in cash or recorded2 Accrued Expenses Expenses incurred but not yet paid in cash or recorded </li> <li> 8. ILLUSTRATION 3-3 TRIAL BALANCE The Trial Balance is the starting place for adjusting entries. </li> <li> 9. STUDY OBJECTIVEPrepare adjusting entries for accruals.Prepare adjusting entries for accruals. </li> <li> 10. ACCRUALSThe second category of adjusting entries is accruals.Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period.The adjusting entry for accruals will increase both a balance sheet and an income statement account. </li> <li> 11. ILLUSTRATION 3-10 ADJUSTING ENTRIES FOR ACCRUALS Adjusting Entries Accrued Revenues Asset RevenueDebit CreditAdjusting AdjustingEntry (+) Entry (+) Accrued Expenses Expense LiabilityDebit CreditAdjusting AdjustingEntry (+) Entry (+) </li> <li> 12. ACCRUED REVENUESAccrued revenues may accumulate with the passing of time or through services performed but not billed or collected.An asset-revenue account relationship exists with accrued revenues.Prior to adjustment, assets and revenues are understated.The adjusting entry requires a debit to an asset account and a credit to a revenue account. </li> <li> 13. ADJUSTING ENTRIES FOR ACCRUALS ACCRUED REVENUESADJUSTMENTADJUSTMENT October 31, the agency earned $200 for advertising services that were not billed to clients before October 31.JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING </li> <li> 14. ACCRUED EXPENSESAccrued expenses are expenses incurred but not paid yet.A liability-expense account relationship existsPrior to adjustment, liabilities and expenses are understatedThe Adjusting Entry results in a debit to an expense account and a credit to a liability account </li> <li> 15. ADJUSTING ENTRIES FOR ACCRUALS ACCRUED INTERESTADJUSTMENTADJUSTMENT October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING </li> <li> 16. ADJUSTING ENTRIES FOR ACCRUALS ACCRUED SALARIESADJUSTMENTADJUSTMENT October 31, accrued salaries are calculated to be $1,200.JOURNAL ENTRY JOURNAL ENTRY POSTING POSTING </li> <li> 17. ILLUSTRATION 3-16 SUMMARY OF ADJUSTING ENTRIES 1 Prepaid Assets and Assets overstated Dr. Dr.Expenses expenses expenses Expenses understated Cr. Cr.Assets2 Unearned Liabilities and Liabilities overstated Dr. Liabilities Dr. revenues revenues Revenues understated Cr. Revenues Cr.3 Accrued Assets and Assets understated Dr. Assets Dr. revenues revenues Revenues understated Cr.Cr.Revenues4 Accrued Expenses and Expenses understated Dr. Expenses Dr. expenses liabilities Liabilities understated Cr. Liabilities Cr. </li> <li> 18. Effects of the Adjusting Entries Make end-of- Journalize year Post entries to Prepare trialtransactions. adjustments. the ledger balance. accounts. Lets look at JJs Lawn Care Lets look at JJs Lawn Care Services adjusted trial balance. Services adjusted trial balance. Prepare adjusted trial balance. </li> </ul>


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