1.

Record adjusting entries

• Adjusting entries are journal entries
• Adjusting entries are made at the end of an accounting period (year end or month end) to
record revenues and expenses.
• Adjusting entries never include cash.
• Adjusting entries always include a revenue or an expense.

Revenues: Cash earned by providing services or selling products to customers.

According to the Revenue Recognition Principle, revenues are recorded in the
accounting period in which services and products are provided to customers, NOT
necessarily in the period in which cash is received from customers.
Expenses: Costs of providing products and
services to customers Cost of
generating revenue
Amounts used when providing products and
services to customers Expired asset
According to the Matching Principle, expenses are record in the same accounting
period as the revenues they help to generate. That is, expenses are matched with
revenues.
If expenses cannot be matched with revenues, record expenses in the accounting
period they occur.

What is the only reason businesses have expenses? To help generate revenue

Depreciation Expense and Accumulated Depreciation

On 1/1/2017, Dying Airline purchases Aircrafts for $1 billion. The aircrafts have a 10 year life and
$0 residual value.
Dying Airline will report the following information on its Income Statement and Balance Sheet:
Income Statement (period of time) Depreciation Expense Depreciation Expense Depreciation Expense
$100,000,000 $100,000,000 …………… $100,000,000

Balance Sheet (as of a date) 1/1/2017 12/31/2017 12/31/2018 12/31/2025 12/31/202

Long-term assets:
Aircrafts $1,000,000,000 $1,000,000,000 $1,000,000,000 $1,000,000,000 $1,000,000,
Less Accumulated depr.--Aircrafts $0 ($100,000,000) ($200,000,000) ($900,000,000) ($1,000,000,
Book Value-Aircrafts $1,000,000,000 $900,000,000 $800,000,000 $100,000,000
On 12/31/2025, you are considering investing in Dying Airline. From reviewing the above
information, what would be your primary concern?