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The Adjusting Process
The Adjusting Process
The Adjusting Process
Process
Chapter 3
Differentiate between
cash basis accounting
and accrual basis
accounting
such as a month,
quarter, or year.
• Any twelve month period is referred to as a
fiscal year.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 3-7
The Revenue Recognition Principle
Revenue should be
The amount of
recorded when it is
revenues must
EARNED.
represent the
actually selling
price.
A good has
The If a $200 item is
been delivered
earnings discounted to
or a service
process is $100, then the
has been
complete. revenue is $100.
performed.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 3-8
The Matching Principle
Prepaids Accruals
1.Prepaid Expenses 1.Accrued revenues
2.Unearned Revenues 2.Accrued expenses
Prepaid Rent
Dec. 1 3,000
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 3-16
Prepaid Rent Example
Paying rent in advance gives us the right to use
the property for 3 months (in this case). By the end
of December, 1/3 of that right has been used.
Prepaid Rent
Dec. 1 3,000
Prepaid Rent
Dec. 1 3,000 1,000 Dec. 31
Unearned Revenue
600 Dec. 21
Unearned Revenue
Dec. 31 200 600 Dec. 21
spreadsheet to
Unearned Revenue
Common Stock
400
37,800
130 270
37,800
the Adjusted
Dividends 8,000 8,000
Delivery Revenue 23,000 355 23,355
Trial Balance
Rent Expense 3,000 800 3,800
Salaries Expense 4,500 875 5,375
columns.
Supplies Expense 80 80
Utilities Expense 180 180
Depreciation Expense - Delivery Van 750 750
Depreciation Expense - Equipment 300 300
Total 62,230 62,230 3,160 3,160 64,380 64,380
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 3-38
Learning Objective 7
Understand the
alternative treatments
of recording prepaid
expenses and
unearned revenues
(Appendix 3A)