Download Top of Form Week 2: The Accounting Information System and

Week 2: The Accounting Information
System and Accrual Accounting Concepts Discussion
Accrual Accounting and Adjusting Entries(graded)
In this area, we will talk about the difference between cash-basis and accrual-basis accounting, the importance
of revenue recognition and matching principles, and the role of adjusting and closing entries in the preparation
of the income statement, statement of retained earnings, and balance sheet.
How is cash-basis accounting different from accrual-basis accounting?
Responses
Responses are listed below in the following order: response, author and the date and time the
response is posted.
Response
Author
Date/Time
Welcome to
week 2
threaded
discussions!
Professor Wilson
3/6/2013 11:50:15 AM
Class,
In this area, we will talk about the difference between cash-basis and accrual-basis
accounting, the importance of revenue recognition and matching principles, and the
role of adjusting and closing entries in the preparation of the income statement,
statement of retained earnings, and balance sheet.
How is cash-basis accounting different from accrual-basis accounting?
Prof Wilson
RE:
Welcome to
week 2
Geri Waldbillig
threaded
discussions!
3/10/2013 2:41:30 PM
Cash-basis accounting and accrual-basis accounting are also known as cash
method and accrual method accounting.
In regard to how they differ:
The Cash method accounting counts the transaction when the cash or check
transpires; not when the goods or services are received.
The Accrual method accounting counts the transaction when it takes place;
when you receive the goods or service; not when the cash transpires.
For example, I purchased some exercise equipment for my new business. I
received the equipment on March 10, 2013 but I did not pay for it until June
10, 2013.
Using the Cash method I would not make an expense entry until I made the
payment June 10,2013.
Using the Accrual method I would make an expense entry on March 10,2013.
Fishman, Stephen, J.D. Cash vs Accrual Accounting. Nolo.com. Retrieved
March 10, 2013, from
http://www.nolo.com/legal-encyclopedia/cash-vs-accrual-accounting29513.html
RE:
Welcome to
week 2
David Neville
threaded
discussions!
3/11/2013 9:58:18 AM
Cash-basis accounting is the simplest form of accounting and what we use
every day at our banks. Accrual-basis is more complex but gives more
detailed information about the financial transactions. Here is a chart
explaining the difference I obtained from the internet:
Cash basis
Revenues are recorded when they are
received, which may be before or after
they are earned.
Expenses are recorded when they are
paid, which may be before or after they
are incurred.
Financial statements reflect revenues
and expenses based on when
transactions were entered rather than
when revenues were earned or expenses
Accrual basis
Revenues are recorded when they
are earned, which may be before or
after they are received.
Expenses are recorded when they
are incurred, which may be before
or after they are paid.
Financial statements match
revenues to the expenses incurred
in earning them, and more
accurately reflect the results of
incurred.
operations.
A receivable is recorded when
No receivables are recorded.
payment is not received at the point
of sale.
Payables are recorded when
No payables are recorded.
payment is not made at the time of
purchase.
Revenues and expenses are
No method of tracking partial payments recorded in full, even though
is available.
partial payments may be made over
extended time periods.
Understanding cash and accrual basis accounting - Office - Microsoft
http://office.microsoft.com/en-us/support/understanding-cash-andaccrual-basis-accounting-HA010164612.aspx - 37k
RE:
Welcome to
week 2
Jessica Dallek
threaded
discussions!
3/11/2013 2:22:19 PM
Cash-basis accounting is when you do not record a transaction until cash is
received or paid out for a particular event. Accrual-basis accounting records
a transaction based on when the event takes place, even if you have not
received or paid out cash. For example, working for the local government, I
use accrual based accounting. I typically write purchase orders for the
majority of the goods, supplies, equipment that we buy. Since we have a
standard of net 30 days from the time the item arrives until it is paid, the same
event or transaction could take place over the course of two months.
However, I record the transaction on the day that I order the supplies, and
make another recording of the payment for that transaction on the day that I
send payment. This concept could be linked along with the expanded
accounting equation process which we are discussing in the other discussion
thread for this week and then of course the adjusted enteries concepts as
learned in Chapter 4. It's interesting to see all of this come together and how
one concept relates to the next. :-)
RE:
Welcome to
week 2
Elizabeth Smith
threaded
discussions!
3/11/2013 2:44:07 PM
How is cash-basis accounting different from accrual-basis accounting?
The simplest way of comparing by a table
Cash-basis accounting
Accrual-basis accounting
Use by small companies
Use large companies to report to their
investors
Not conformed to the provision of
GAAP
Conformed to the provisions of GAAP
There’s a time gap between recording
the transaction
The transaction is recorded based on
accrual principal
http://www.businessdictionary.com/definition/accrual-basis-accounting.html
http://www.businessdictionary.com/definition/accrual-basis-accounting.html
RE:
Welcome to
week 2
Professor Wilson
threaded
discussions!
3/11/2013 3:26:34 PM
Elizabeth, et al (and rest of the class),
Thanks for the postings and discussion on cash-basis and accrualbasis accounting. Good summary on the different basis. To continue
the discussion, please consider the following:
Between the cash basis and accrual basis, which method provides a
better picture of the overall profitability of a company? Why do you
believe that method provides better picture?
Prof Wilson
RE:
Welcome to
week 2
Geri Waldbillig
threaded
discussions!
3/11/2013 4:21:02 PM
"The accrual basis gives a more accurate picture of profit or
loss because it includes all revenues and expenses, paid or
unpaid....The cash basis only records cash transactions."
Snyder, Stan. Understanding cash and accrual basis
accounting. Microsoft.com. Retrieved March 11, 2012 from
http://office.microsoft.com/en-us/accountinghelp/understanding-cash-and-accrual-basis-accountingHA010164612.aspx
RE:
Welcome to
week 2
Kristin Muchowski
threaded
discussions!
3/11/2013 8:18:53 PM
The accural basis is a better method, providing a better
picture to you as it includes all transactions that one would
need to see other than just revenue. Accural basis shows a
much larger picture than the cash basis and gives you a
better understanding of where your company stands
financially, not just specifically to revenue.
RE:
Welcome to
week 2
Jessica Dallek
threaded
discussions!
3/11/2013 10:58:33
PM
I believe that a accrual basis method provides a better
picture of the overall profitability of a company because you
have more accurate books especially when going between
accounting periods, including month to month or from one
fiscal year to the next. Using cash based would create a lot
of inaccuracies in my opinion. Say we had a transaction
from a customer on March 11th and are expecting a cash
payment within 30 days, but we used the cash basis
accounting, when we close March, we never would have
recorded that transaction until probably April. It seems as
though there would be a lot of back and forth and a larger
margin of error, especially when showing profit and loss on
an income statement.
RE:
Welcome to
week 2
Darnell Flax
threaded
discussions!
3/12/2013 1:01:30 AM
In my opinion I believe Accrual basis provides a better
picture of the overall profitability of a company because
unlike cash Accrual records every transaction even if cash
was not exchange.... therefor if products were sold on store
credit it will not be shown in a cash basis accounting.........
RE:
Welcome to
week 2
Kelly Stewart
threaded
discussions!
3/12/2013 9:27:30 PM
Accrual basis accounting provides a better picture of the
overall profitability of a company. This is because it shows a
expense or revenue has taken place, and cash payable or
receivable will also show to balance the transaction. Cash
basis accounting can show many expenses but no payment,
or vise vera and will often offset how one would see the
reality of the transaction. In cash basis account, for example,
a company may be paying cash expenses to complete a
construction job. This may be recored as all expenses for a
given period of time (showing a loss) and not show that at
the time of completion of the job they will receive payment
and make a profit.
RE:
Welcome to
week 2
Makiko Kishida
threaded
discussions!
3/13/2013 10:04:04
AM
Hi Prof Wilson, Class,
I can see how for some very small businesses cash-basis is
the only way to go, with expenses only being paid out when
cash comes in, however I believe that accrual-basis provides
a better picture of the overall profitability of a company
because it shows more of a real-time view as well as more
of what is going to happen in the future unlike cash-basis
which only recognizes revenue or expense when cash goes
in or out.
In cash-basis the possibility for a company to show inflated
or deflated revenue or more or less expenses than actuality
based on timing is much greater. For example, if a company
provides services and all the customers are very timely in
payment one month, but the company does not pay their
expenses on time and holds off until the next month, it could
look like in one month, the company went from large
revenue to large expenses. In the same situation, if accrualbasis were used, even if revenue incoming was the same,
expenses would be accrued in accounts payable and
recorded in the proper month of occurrence, not when the
company decides to pay it or receives an invoice months
later.
RE:
Welcome to
week 2
Vi Nguyen
threaded
discussions!
3/13/2013 1:14:42 PM
I believe the accrual basis provides a better picture of the
overall profitability of a company because it records records
when after the transaction has occur so the money that was
given before the transaction was complete is now a part of
the company. Cash basis records the cash that was given
before the transaction is perform. If the customer were to
cancel the transaction, then the company would have to give
back the money, in which that transaction no longer exist in
the books.
RE:
Welcome to
week 2
Kimberly Warren
threaded
discussions!
3/13/2013 1:32:16 PM
I believe accrual accounting gives a more accurate picture
because it provides you with transactions from when they
are earned. This provides a better picture for the financial
statements to reflect what expenses and revenues are earned
in the period for which they are posted.
RE:
Welcome to
week 2
Elizabeth Smith
threaded
discussions!
3/13/2013 2:46:42 PM
It depends on the size of the company; for smaller companies, cash
basis method is an accurate picture of the company’s cash flow.
The downfall for cash basis, it doesn’t take in account the
inventory, just the cash flow.
For large companies that are listed, they are required to use accrual
basis. It creates an accurate picture of the company’s profitability.
The down fall, you may end up paying taxes before you actually
receive the income.
So, if I was to run my own business like Pampered Chef
then I would use cash basis. If was to have a company that
is listed, Dell, I would use accrual basis.
http://www.ehow.com/how_2282513_decide-between-cash-accrual-accounting.html
RE:
Welcome to
week 2
Stacy Davis-Green
threaded
discussions!
3/13/2013 6:41:18 PM
Accrual basis is the most profitable for larger
companies. This method allows for the companies to
track and record transactions as they occur but also
owners and managers can review the
transaction reports each reporting period and
determine what sales and cash flows to expect
in the future.
RE:
Welcome to
week 2
Staci Pearcey
threaded
discussions!
3/14/2013 8:37:00 PM
Between cash basis and accrual basis, I believe that the
accrual method gives a better overall picture of profitability.
While the advantage of using the cash basis is better cash
visibility, it may not be accurate since income is recorded
when the business gets paid (which could be income from
prior weeks or months and can be misleading). The accrual
basis may not have the same insight into cash flow but it can
better predict profitability based on services performed with
expectation of getting paid (and typically a percentage of
bad debt can be established). The accrual basis offers
certain advantages that can be useful tools in forecasting and
predicting future performance, tracking sales trends based
on when they performed to streamline inventory purchases
and also provide a more accurate picture of industry
performance and benchmarking.
RE:
Welcome to
week 2
Justin Noel
threaded
discussions!
3/15/2013 8:21:31 AM
Cash seems less accurate with not account for when transactions happen.
Looking at how they breakdown when a transaction happens and when
credit and debit happens then it is accounted for shows amounts of credit
and debit that was received in that year instead of when it
happened. Accrual is more of an overall transaction showing when
charges are done and payments are scheduled making it easier to see a
profit or loss for the time frame. Which leads me to believe
that accrual would be a better predictor method then cash as it will give
you a better number based off the time that transaction happen rather
then when payment is completed or expenditure is recorded when
payment of the expenditure changed hands. As it would show a more
inconclusive number that is harder to use it to predict the future of cash
flow when they are not recorded.
RE:
Welcome to
week 2
Kaswelda Carter
threaded
discussions!
3/11/2013 5:41:40 PM
The difference between cash-basis accounting and accrual accounting is that
accrual-basis accounting is when a transaction that change a company's
financial statements are recorded in the periods in which the events occur,
even if cash was not exchanged. An example of accrual is when a company
recognizes revenue when earned even if cash was not received. Cash-basis
accounting is when companies record revenue only when cash is received.
They record expense only when cash is paid.
RE:
Welcome to
Darnell Flax
week 2
threaded
3/11/2013 10:46:13 PM
discussions!
The main difference between accrual and cash basis accounting is the timing
of when revenue and expenses are recognized. The cash method is most used
by small businesses and for personal finances. The cash method accounts for
revenue only when the money is received and for expenses only when the
money is paid out.On the other hand, the accrual method accounts for revenue
when it is earned and expenses goods and services when they are incurred.
The revenue is recorded even if cash has not been received or if expenses
have been incurred but no cash has been paid.
Source: http://www.investopedia.com/ask/answers/09/accrualaccounting.asp#ixzz2NIViaoI
RE:
Welcome to
week 2
Makiko Kishida
threaded
discussions!
3/12/2013 1:41:11 PM
Hello Prof Wilson, Class,
Cash-basis accounting accounts for any revenue when the cash is received
and accounts for any expense when cash is paid. Accrual-basis accounting
accounts for revenue when it is earned and accounts for expenses when they
are incurred. As an example of the difference, in cash-basis, if a company
signs on a deal to sell a product they only record the revenue when the
payment is received. In accrual-basis, the company would record the revenue
at the time of signing the deal. Expenses also do not show in cash-basis until
the cash actually is used to pay for the expense and for accrual-basis it would
show up at the time of, for example, signing a contract to buy new furniture
even if the payment is not yet made.
Bottom line, the difference between these two methods is the timing of when
transactions such as sales and expenses are accounted for.
Cash basis
vs Accrual Kimberly Warren
accounting
3/12/2013 2:10:39 PM
Cash-basis is when cash is actually paid or received. This way of accounting
is not approved by GAAP because it does not recognize revenue and
expenses when earned.
Accrual accounting is when expenses and revenues are posted in the period in
which they occur. Accrual-basis accounting is based on the revenue and
expense recognition principles.
RE:
Welcome to
week 2
Vi Nguyen
threaded
discussions!
3/12/2013 4:16:20 PM
Cash-basis accounting is when companies record cash as a revenue when they
receive the cash and expense when the cash is paid. Accrual-basis accounting
is recording a transaction on to the financial statement when the event when
the company earns revenue or when expenses are incurred.
RE:
Welcome to
week 2
Justin Noel
threaded
discussions!
3/12/2013 7:55:44 PM
Cash-basis accounting is different from accrual-basis accounting in that the
company's expense items don't get recorded when the expense happens. The
same is true for how they treat revenue of the company - it gets recorded
when it's earned (basically, once they receive the cash). I think too that some
companies may find that it's easier to track accounting transactions real-time
without accruals if their company is like a mom-and-pop type of shop.
However, companies can lose pace with how to keep up with matching
expenses and revenues if they are not careful under cash-basis accounting.
In accrual-based accounting, the revenue gets recognized when earned but
recognized when goods and services have been rendered (i.e. completed),
similar to that of a construction-type contract of a large company who may
utilize the percentage-of-completion method (which defers the recognition of
revenue until the project is essentially complete). The same is true for the
expenses, as they get recorded when they are incurred.
RE:
Welcome to
week 2
Kelly Stewart
threaded
discussions!
3/12/2013 9:16:32 PM
Cash basis accounting is represented exactly how one would imagine given its name.
Transactions are recorded are recorded when cash is either received or cash is paid out.
Although often it may be a more simplistic form of accounting, it is not supported by GAAP
and may cause misleading information due to the time gap that may occur between the
expense or revenue and the receiving or paying out of cash.
Accrual basis accounting records transactions in the same period in which the event for that
transaction occurred. For example, lets say a customer receives supplies today with 60
payment terms. That revenue will be recorded now, even though we wont see payment for the
supplies sold for 60 days from now. Conversely, lets say you bought some new supplies from
a vendor and recieved them today, but dont have to pay for them for another 60 days. The
expense will be recorded today when they were incurred, even though they wont be paid for
for another 60 days. Basically revenues are recorded when they are earned (even if cash has
not been recieved) and expenses are recognized whein it takes place (not when it is paid for).
Simply put the difference between the two is that Cash basis accounting
records the transaction when the cash is exchanged while accrual basis
accounting records the transaction at the time the revenue or expense occurs.
I also found this to be helpful: http://www.dummies.com/howto/content/deciding-between-cashbasis-and-accrual-accounting.html
RE:
Welcome to
week 2
Staci Pearcey
threaded
discussions!
3/12/2013 11:18:42 PM
Cash basis accounting records transactions when cash is physically received
for services and when expenses are actually paid. Accrual basis accounting
records transactions as they occur whether or not cash has been received. For
example, services are performed today, but not paid for until the end of the
month. The transaction would record today regardless of when payment
occurs. The same applies for expenses. Expenses are booked when incurred,
not when actually paid.
Essentially, the only difference between cash and accrual accounting is the
timing of recording the transaction. Typically smaller businesses use the cash
method of accounting and larger businesses use accrual accounting.
RE:
Welcome to
week 2
Joshua Roque
threaded
discussions!
3/13/2013 1:17:25 PM
Cash basis accounting is focused on recording transactions that are dealt with
cash instead of credit. In addition, if a company has a balance or an expense
that needs to be paid, it will only be recorded if has also been paid within
cash. Accrual accounting deals with anything that is earned withina
particular business. These earnings are recorded whether or not there is an
actual recepit of payment or when it was paid.
The main difference between the two seems to be when their earnings are
recorded in the books. When working with cash basis accounting, any event
or transaction is recorded when a cash payment is made or received. Thus,
there is no real way to determine or log future earned transactions because
everything is billed when the cash is received.
In accrual accounting, a business can indicate revenue even if the customer
has not paid their bill towards the specific company. Within our lecture it
indicates that a furniture business can record a bill even if the customer does
not pay for a long duration of time after their product was received. AA
seems to be more reliant on customer based promises and the use of invoices
to determine the amount of money owed and what will be paid at the time of
service. While CA is used more immediately when cash is actually received
( Wilson 2013 )
RE:
Welcome to
week 2
Stacy Davis-Green
threaded
discussions!
3/13/2013 5:32:17 PM
Cash-basis and Accrual basis are two different types of accounting methods
used to record the timing of financial transactions. In Cash-basis accounting,
the transactions are recorded at the actual time. In Accrual-basis accounting,
the transactions are recognized when given, received or incurred. Cash basis
accounting records expenses only when cash is paid, and records revenue
when cash is received. With Accrual-basis accounting, expenses are
recognized when incurred, and revenue are recognized when earned. Most
large business/companies use the accrual basis method while the cash basis
method is used by smaller businesses.
Example: Let's say you own a business that sells machinery. If you sell
$5,000 worth of machinery, under the cash basis method, that amount
is not recorded in the books until the customer hands you the money or
you receive the check. Under the accrual basis method, the $5000 is
recorded as revenue immediately when the sale is made, even if you
receive the money a few days or weeks later. The same thing occurs for
expenses. If you get an electric bill for $1700, under the cash basis
method, the amount is not added to the books until you actually pay the
bill. However, under the accrual basis method, the $1700 is recorded
as an expense the day you get the bill.
1.
Reference
Kimmel, P.D., Weygandt, J.J., Kieso, D.E., Financial Accounting: Tools for Business Decision
Making. 6th ed., 2011. John Wiley & Sons, Inc. Illinois
Read more: http://www.investopedia.com/ask/answers/09/accrualaccounting.asp#ixzz2NSuoniWZ
RE:
Welcome to
week 2
Geronia Frederick
threaded
discussions!
3/13/2013 5:36:32 PM
The main difference between accrual and cash basis accounting is the timing
of when revenue and expenses are recognized.
RE:
Welcome to
week 2
Sara Rinaldo
threaded
discussions!
3/13/2013 8:37:04 PM
The timing when revenues and expenses are recognized is the main
difference between accrual and cash basis accounting. In cash basis
accounting, revenue and expenses are recorded when the money is
received and paid out respectively. In accrual basis accounting revenues
and expenses are recorded when earned or incurred respectively.
Source: http://www.investopedia.com/ask/answers/09/accrualaccounting.asp#ixzz2NTeb4l1y
RE:
Welcome to
week 2
Tia Miller
threaded
discussions!
3/13/2013 11:02:50 PM
Under Cash Basis accounting, the company records revenue only when cash
is received. Expenses are recorded only when cash is paid.
This is different thant Accrual basis accounting since transactions that change
a company's financial statements are recorded in the periods in which the
events occur, even if cash is not exchanged.
RE:
Karla Craig
3/17/2013 3:13:45 AM
Welcome to
week 2
threaded
discussions!
Cash basis accounting is mostly done by sole proprietors/ small businesses.
The Cash is recorded exactly when it is received in cash and expenses
recorded only when paid in cash. There are no cash payable or receivable
accounts.
Accrual basis accounting is when cash is recorded when it is earned and
expenses recorded when it is incurred. Both transactions are done regardless
of when they happen. The accrual basis approach is recorded as current
regardless if cash is being paid out or received at the current time.
Accrual
and cash
accounts
Rachid Khalfaoui
3/10/2013 8:19:59 PM
Hi Pr Wilson and class,
The timing is the main difference between accrual and cash accounts and when revenues and expenses
are recognized by two accounts. For the cash method the revenue and expenses are respectively
accounted when the money is received and when the money is paid out. For the accrual method revenue
and expenses are respectively accounted when it's earned and when they are incurred. The revenue is
recorded before the cash has been received or the expenses have been incurred before the cash has been
paid. The cash method is most used by small businesses or personal finances and the accrual accounting
is the most common method of large companies.
Rachid
RE:
Accrual
and cash Stephen Prestwich
accounts
3/13/2013 9:30:55 PM
Some examples of accrual accounting is when a customer buys
products using a credit card, or when buying a car or furniture and the
company allows the customer to wait 30 - 60 or 90 days before the first
payment. Accrual accounting is done on promises made between the
customer and business on when the payment(s) will be made.
TO CLASS
- PLEASE
READ - TO
Professor Wilson
CLASS Adjusting
entries
3/12/2013 6:05:35 AM
Class,
Good start to the thread this week in the discussion of cash-basis and accrual-basis
accounting.
As we continue to work through the materials for week 2, please consider the
following:
Why do companies make adjusting entries? When are adjusting entries made and at
what point in the accounting process? Please provide examples of adjusting entries.
Prof Wilson
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO
CLASS Adjusting
entries
3/12/2013 11:54:47 AM
Companies make adjusting entries so that when it comes time to prepare
financial statements there is accurate representation of balances between
credits and debits at the end of a particular period so there is no under or over
statement of assets, liabilities or owner equity. Adjusting entries are made
during the end of a period after journal entries are posted to the ledger and an
initial trial balance has been run. After you make the adjustment entries, you
can run an adjusted trial balance. An example of an adjusted entry would be
unearned service revenue, which is a liability where cash is received for
services not yet performed. One would adjust the original entry by debiting
the liability unearned revenue and crediting the revenue account when the
service is actually performed. This would reflect accuracy in recording for
the period.
I found a source for expanding the information we learned this week on
adjusting entries: accruals and deferrals:
http://www.netmba.com/accounting/fin/process/adjusting/
RE: TO
CLASS PLEASE
READ TO
CLASS -
Makiko Kishida
3/12/2013 2:13:23 PM
Adjusting
entries
Modified:3/12/2013 2:47 PM
Hello Prof Wilson, Class,
Companies make adjusting entries in order to ensure that any revenue earned
and any expenses incurred are properly accounted for in the proper period and
they typically involve a deferral or an accrual entry which hits a balance sheet
account and an income statement account. These entries are usually made
right before any financial statements are generated.
An example of an adjusting entry would be a prepaid expense adjustment. For
example, if a subscription service is paid for in advance for the entire year at
the beginning of the year (entry is Credit payables, Debit Prepaid Expense),
but must be adjusted monthly to reflect the monthly expense and decrease the
prepaid amount. The monthly adjusting entry would be to Credit the prepaid
expenses account and Debit the subscription (expense) account.
RE: TO
CLASS PLEASE
READ Rachid Khalfaoui
TO
CLASS Adjusting
entries
3/12/2013 3:54:25 PM
Hi Pr Wilson and class,
Companies make adjustments to prepaid and accrued accounts when financial reports are
prepared before end of periods. adjustments provide real indications on what exactly and on
time the income and expenses are and where the company stands financially. There are
deferred (prepaid expenses and unearned revenue) and accrued (accrued revenue and accrued
expense) adjustments. When a expenses is prepaid, an asset is created. In the example of an
one year insurance policy, we first journalize the entry for the whole period and second we
adjust the entry at the end of the first month. In the example of accrued revenue, a revenue
has been earned but cash not yet been received. An accrual adjustment must be made. The
first entry is made at the end of the first period with the corresponding amount. each period
adjusting entry is made with the same amount until the end the cash is debited the total
amount.
Rachid
RE: TO
CLASS PLEASE
Geri Waldbillig
3/12/2013 5:47:51 PM
READ TO
CLASS Adjusting
entries
Companies make adjustments to record activity in transactions that may have
changed a previously recorded transaction. For example, supplies were
purchased on 1/29/13 on account. Payment was not made until 3/15/13. The
initial transaction would record the supplies as an increase in revenue along
with an increase in liability for accts payable. Once the bill is paid there is a
decrease in cash and a decrease in accts payable.
Accounts are usually adjusted at the end of a period such as year, quarter,
month.
RE: TO
CLASS PLEASE
READ Kristin Muchowski
TO
CLASS Adjusting
entries
3/13/2013 9:39:46 AM
Adjusting entries are recorded at the end of an accounting period. The entries
are to adjust ledger accounts for any changes that relate to the current
accounting period, these entries have not been recorded yet.
There are two scenarios where adjusting journal entries are needed before the
financial statements are issued:
Nothing has been entered in the accounting records for certain expenses or
revenues, but those expenses and/or revenues did occur and must be included
in the current period's income statement and balance sheet.
Something has already been entered in the accounting records, but the amount
needs to be divided up between two or more accounting periods.
Source: http://www.accountingcoach.com/online-accountingcourse/08Xpg01.html
RE: TO
CLASS PLEASE
David Neville
3/13/2013 10:33:47 AM
READ TO
CLASS Adjusting
entries
I obtained this information about adjusted entries from the posted web-site
and thought it explained it well.
"Adjustment entries fall into one of five categories: accrued revenues,
accrued expenses, unearned revenues, prepaid expenses, and depreciation."
"Before financial statements are prepared, additional journal entries, called
adjusting entries, are made to ensure that the company's financial records
adhere to the revenue recognition and matching principles. Adjusting entries
are necessary because a single transaction may affect revenues or expenses in
more than one accounting period and also because all transactions have not
necessarily been documented during the period."
The site gives a good example:
"Each adjusting entry usually affects one income statement account (a
revenue or expense account) and one balance sheet account (an asset or
liability account). For example, suppose a company has a $1,000 debit
balance in its supplies account at the end of a month, but a count of supplies
on hand finds only $300 of them remaining. Since supplies worth $700 have
been used up, the supplies account requires a $700 adjustment so assets are
not overstated, and the supplies expense account requires a $700 adjustment
so expenses are not understated."
Accounting Principles I: Adjusting Entries
http://www.cliffsnotes.com/study_guide/AdjustingEntries.topicArticleId-21081,articleId-21016.html - 60k -
RE: TO
CLASS PLEASE
READ Professor Wilson
TO
CLASS Adjusting
entries
3/13/2013 2:31:13 PM
David, et al (and rest of the class),
Thanks for the postings and discussion on why and when adjusting
entries are made. Let's continue our discussion on this items and
focus on examples. I saw few examples in couple of postings but
would like to see some additional items.
Prof Wilson
RE: TO
CLASS PLEASE
READ Zach Monroe
TO
CLASS Adjusting
entries
3/13/2013 9:03:58 PM
Many of my classmates have posted some good information
regarding adjusting entries. Keeping in mind that at a basic
level adjusting entries are done so that revenue can be
reflected in the time period that it was earned and expenses
can be reflected in the time period they were incurred; I can
think of a couple of examples of adjusting entries from my
digital marketing world. I work with quite a few third party
software as a service (SAS) vendors for various digital
marketing services.
One vendor provides us with a service that monitors and
tracks our inbox deliverability for email marketing
campaigns. This particular vendor bills us one time, in
advance, for an entire year's worth of service. We are
actually paying for the service before we receive it, so this
would classify as a deferral, or prepaid expense.
Another example would be the third party vendor that
provides a SAS to "cleanse" contacts in our database. They
bill us every three months for the contacts they have already
cleansed. We are actually incurring the expense but have
not yet paid it in cash or recorded it so the expense, in this
situation, is being accrued.
RE: TO
CLASS PLEASE
READ Lisa Childs
TO
CLASS Adjusting
entries
3/13/2013 9:53:06 PM
Yearly expenses would warrant an adjustment entry. For
example a yearly insurance policy, or a yearly lease.
Additional
Examples
of
Jessica Dallek
Adjusting
Entries
3/14/2013 11:55:44
AM
Another example for adjusting entries would include:
Accrued expenses for salaries. Especially when the pay
period is paid in a month subsequent to the month in which
salaries were earned by employees. This is where at the end
of the month, the employer would take account of any days
salaries were earned in a particular month, but not yet paid
out until the following month. Example: For the month of
March 2013... At my job I am paid on the 15th and last day
of the month. I work dates 16-31 of March but am not paid
for those dates until the 15th of April. If I were to make an
adjusting entry for the month end March 31, 2013, I would
include an adjustment of days 16-31 of the amount of salary
expensed for that pay period in March as this is when the
salary was earned.
RE: TO
CLASS PLEASE
READ Darnell Flax
TO
CLASS Adjusting
entries
3/13/2013 7:10:14 PM
Companies use adjusting entries because their assest, liabilities and expenses
never stay the same they always change for example when a company but
something on account it goes to Acct. Receivable then if a payment is made it
will then be posted to both Acct. Receivable to balance it and Cash for the
payment they made...
RE: TO
CLASS PLEASE
READ TO
Kaswelda Carter
3/13/2013 9:42:18 PM
CLASS Adjusting
entries
Adjusting entries are made to ensure revenues are recorded in the period in
which they are earned, and for expenses to be recognized in the period in
which they are incurred. Some examples that are provided from the textbook
are:
The use of supplies and the earnings of wages by employees.
A utility bill that will not be received until the next accounting period.
Changes related to the use of buildings and equipment, rent, and insurance.
RE: TO
CLASS PLEASE
READ Stacy Davis-Green
TO
CLASS Adjusting
entries
3/13/2013 10:02:13 PM
Our text informs us that companies make adjusting entries "in
order for revenues to be recorded in the period in which they are
earned, and for expenses to be recognized in the period in which
they are incurred." (Kimmel 167) Generally adjusting entries
are made at the end of the accounting period. A point to
remember about Adjusting entries is each adjusting entry
usually affects one income statement account (a revenue or
expense account) and one balance sheet account (an asset or
liability account). Adjustment entries can be classified as either
Deferrals or Accruals, sometimes deferrals are also known as
prepayments which are payments that are made before the
consumption of goods or services). Accruals are cash paid after
the consumption of goods or services. So you have adjustment
entries that are prepaid expenses, prepaid revenues, accrued expenses
or accrued revenues :
(1) revenues that have been earned but not yet entered into the accounting
records-accrued revenue
(2) expenses that have been incurred but have not yet been entered into the
accounting records-accrued expense
(3) revenues already recorded that involve more than the current accounting
period-prepaid revenues or deferred revenues
(4) expenses already recorded that involve more than the current accounting
period-prepaid expense or deferred expenses
Examples :
Accrued expenses could be interest, taxes, rent, and salaries.
Accrued revenue could be monthly rent
Prepaid revenue could be an airline ticket sales before flight
services or school tuition received during registration.
Prepaid expenses are Quarterly tax estimates, insurance
premiums and retainer fees
http://glossary.tenrox.com/adjustment-entry.htm For more
details
Read more: http://www.businessdictionary.com/definition/adjusting-entries.html#ixzz2NTYoi79S
Kimmel. Financial Accounting, 6th Edition. John Wiley & Sons.
<vbk:9781118233634#outline(4.7)>.
RE: TO
CLASS PLEASE
READ Tia Miller
TO
CLASS Adjusting
entries
3/13/2013 11:15:16 PM
Adjustments are made so that all assets, liabilities, revenues and expenses
reflect their most up to date amounts.
These adjustments are made around the time of the preparation of the
financial statements. There may be some unrecorded revenues, expenses or
unearned revenues and expenses. We have to use adjusting entries to record
these revenues or expenses and adjust the corresponding assets as well as
liabilities.
For example, if we have unearned revenue, before the adjustment, the
liabilities will be overstated and revenues will be overstated. The adjusting
entry to correct this will result in a debit to liabilities and a credit to revenues.
RE: TO
Staci Pearcey
3/14/2013 9:02:55 PM
CLASS PLEASE
READ TO
CLASS Adjusting
entries
"Adjusting entries may be necessary because the trial balance may not
contain up-to-date and complete data" ( Kimmel Paul D., Jerry J. Weygandt,
Donald E. Kieso. Financial Accounting: Tools for Business Decision
Making. 6th ed.) For example, not all transactions are posted daily or in time
before the end of the accounting period. It is necessary to make adjusting
entries in order to prepare financial statements at the end of an accounting
period.
There are two types of adjusting entries: Deferral and Accruals. Deferrals are
prepaid expenses (i.e. payment of insurance policy for coverage not used all
in one month) and unearned revenue. Accruals are accrued revenue (accounts
receivables) and accrued expenses (expenses that are incurred but not paid for
yet).
In my position, there are a number of adjustments that need to be made before
I can prepare our financial statements to include crossover inventory,
inventory in transit. monthly prepaid expense adjustments and accrual of
sales tax, payroll, payroll taxes, worker's comp insurance and tire fees. I
could not accurately prepare financial statements without making these
adjustments.
RE: TO
CLASS PLEASE
READ Vi Nguyen
TO
CLASS Adjusting
entries
3/15/2013 11:36:56 AM
There are two types of adjusting entries: deferral and prepaid revenues and
expenses. Adjustments for deferral happens when the action incurred for
expenses or revenue during the statement period. Adjustments to prepaid
happens when the prepaid expenses occur during that period.
An example of deferral is receiving cash before performing a service. The
cash is held as liability until the service is performed. An example of prepaid
is paying for insurance for an entire year during the statement period.
RE: TO
CLASS PLEASE
READ Elizabeth Smith
TO
CLASS Adjusting
entries
3/15/2013 7:44:40 PM
Companies make journal adjustment entries to reflect the correct balance on the
balance sheet. This is necessary so it won’t mislead the investors in the company’s
financial standing. An example would be if the company sold $1000 worth of product
but it was recorded as $100. There are 3 steps to take.
1. Indentify where the original journal entries were recorded.
2. Identify the correct account balance.
3. Adjust the difference in the journal to reflect the correct balance.
Adjusting Kimberly Warren
entries
3/16/2013 2:55:51 PM
Adjusting entries are made to record transactions that have occurred during
the month such as accumulated depreciation, interest expense, revenue earned
etc...
RE: TO
CLASS PLEASE
READ Sara Rinaldo
TO
CLASS Adjusting
entries
3/16/2013 8:40:20 PM
Companies make adjusting journal entries to make sure that the revenue
recognition and expense recognition principles required by GAAP are
followed. This means that the adjusting journal entries are made to record
revenue when it is earned and record expense when it is incurred. Adjusting
entries are prepared every time the financial statements are prepared.
Adjusting entries are categorized as deferrals or accruals. Deferrals include
prepaid expenses and unearned revenues. An example of a prepaid expense
would be paying for a 2 year insurance plan at the beginning of the 2 year
period. You would initially debit prepaid insurance expense and credit cash.
At the end of the first year, the adjusting entry would debit insurance
expense and credit prepaid insurance expense for the amount of the insurance
used during the year. Accruals include accrued revenues and accrued
expenses. An example of an accrued revenue would be revenue from services
provided that have not yet been paid. The initial entry would be a debit to
accounts receivable and a credit to service revenue. The adjusting entry when
the payment is received would be a debit to cash and a credit to accounts
receivable.
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for business decision
making. (6th ed.). Hoboken, New Jersey: John C. Wiley & Sons, Inc.
RE: TO
CLASS PLEASE
READ Karla Craig
TO
CLASS Adjusting
entries
3/17/2013 3:39:39 AM
Companies make adjusting entries before they prepare financial statements,
as they are required. Adjusting entries are done after each account is analyzed
and are usually done before the preparation of the trial balance statements to
make sure the accounts or up to date and complete to prepare the financial
statement. All adjusting entries must have an income statement and balance
sheet.
Adjusting entries are classified as deferrals or acruals
Deferral: prepaid expenses = supplies bought but not used by the reporting
period of the financial statement.
Accrual: accrued expenses = employee salaries
TO
CLASS PLEASE
READ TO
CLASS closing
entries
Class,
Professor Wilson
3/13/2013 2:31:50 PM
As you continue your work on postings to this thread, please note the additional
question I have regarding adjusting entries in previous post.
Additionally, please consider the following question:
What is the purpose of closing entries and the income summary account? Please
provide examples of closing entries and impact to income summary account.
Prof Wilson
RE: TO
CLASS PLEASE
READ Darnell Flax
TO
CLASS closing
entries
3/13/2013 7:43:48 PM
The purpose of closing entries and the income summary account is when the
accounting term is coming to and end closing entries are recorded where
accounting information in temporary accounts is summarized and transferred
over to permanent accounts.
Source: http://www.ehow.com/info_12026406_purpose-closing-entriesaccounting.html#ixzz2NTQ4iBC3
one example would be empty the income summary account by debiting it for
$5,000, and transfer the balance to the retained earnings account with a credit
of $5,000.
RE: TO
CLASS PLEASE
READ Rachid Khalfaoui
TO
CLASS closing
entries
3/13/2013 8:35:29 PM
Hi Pr Wilson and class,
At the end of the accounting period (year end), companies close entries and the summary of
temporary accounts are transferred over the permanent accounts. The closing entries
emphasize mainly on revenue and expenses accounts. Revenue accounts include sales
revenue and service revenue and expenses accounts contain the cumulative amounts of
expenses throughout the accounting period. These closing entries zero out the revenue and
expenses balances of the ending year transactions and prepare the opening of the new fiscal
year.all the debits and credits are recorded in the income summary which will be closed and
will results in net debit or net credit balance. The income summary's net debit or credit
balance is recorded to the retained earnings or owner's equity.
Rachid
RE: TO
CLASS PLEASE
READ Lisa Childs
TO
CLASS closing
entries
3/13/2013 9:38:57 PM
I have seen separate closing entries made when there is a partnership.
Specifically when used to keep track of draw income. I only had
experienced them at the bank for the use of showing non W-2 income.
RE: TO
CLASS PLEASE
READ Professor Wilson
TO
CLASS closing
entries
3/14/2013 6:35:56 AM
Darnell, Rachid, Lisa (and rest of the class),
Thanks for the posting and discussion on closing entries. Let's
continue to look at this problem and provide specific examples of
what closing entries would look like.
Prof Wilson
RE: TO
CLASS PLEASE
READ Rachid Khalfaoui
TO
CLASS closing
entries
3/14/2013 9:05:57 AM
Hi Pr Wilson, Hi class,
Please find in attachment an example of closing
entries in account.
Rachid
Rachid-Example.rtf
RE: TO
CLASS PLEASE
READ Makiko Kishida
TO
CLASS closing
entries
3/14/2013 2:48:07 PM
Hello Prof Wilson, Class
Since the PL side accounts are considered temporary
accounts that only show one accounting period and the BS
side accounts are considered permanent accounts in which
the amounts carry forward every period, the temporary
accounts must be closed and the balances
transferred/reflected in the appropriate BS side account.
When closing entries are made, the temporary accounts
should show a zero balance at the end of that accounting
period.
The income summary account is used almost like a
temporary note pad to summarize and consolidate all of
the income entries that will be going into the Retained
Earnings account so as to keep the Retained Earnings
closing entry to one shot Net Income or Loss rather than
multiple lines.
As an example of a closing entry:Dr Revenue, Cr Income Summary Account
Dr Income Summary account, Cr Total expenses
RE: TO
CLASS - Stacy Davis-Green
PLEASE
3/14/2013 10:12:05 PM
READ TO
CLASS closing
entries
A closing entry is the process where temporary accounts are
closed by transferring their balances to permanent accounts
by resetting them to zero for the beginning of the next
accounting period. A closing entry is done at the end of
an accounting period. Some examples of temporary
accounts are revenue, expenses and dividends(withdrawal)
accounts. Revenues, expenses, dividends are transferred
over to the permanent accounts such as assets, liabilities, and
owner's capital. There are four ways to closing entries, they
are :
1. To transfer the balance of a revenue account to
income summary account, the revenue account is
debited and income summary account is credited.
2. Expense account is credited and the income
summary is debited for the sum of the balances of
expense accounts.
3. Income summary account is debited and retained
earnings account is credited for the an amount equal
to the excess of revenue over total expenses
4. Transfer the dividend or withdrawal account balance
to the retained earnings account.
Using #1 as an example, To transfer the balance of a
revenue account to income summary account, the revenue
account is debited and income summary account is
credited.......
Date
Jan
31
Account
Debit
Revenue
85,600
Income Summary
Credit
85,600
http://accountingexplained.com/financial/cycle/closingentries
RE: TO
CLASS PLEASE Darnell Flax
READ TO
3/15/2013 5:00:44 PM
CLASS closing
entries
Here is a Image I found that shows a great example of what closing entries would look
like, they are closing Temp accounts to Zero balance for next fiscal year..
Source: http://www.edzone.net/~jewert/classes_old/acct2/ch26_green/26_4.htm
RE: TO
CLASS PLEASE
READ Elizabeth Smith
TO
CLASS closing
entries
3/15/2013 7:45:08 PM
Closing entries are done to close the accounting cycle and to set the
temporary accounts to zero. This is done to prepare the temporary
accounts for the next accounting period. This is also done to
prepare the company’s retained earnings statement.
The income summary Account is only used during the closing
process. This determines the net income from the company’s
revenues and expenses.
closing
entries Jessica Dallek
3/14/2013 12:05:23 PM
Good afternoon,
The purpose of closing entries is to ultimately obtain a closing trial balance
for the month end which helps prove the accuracy and quality of the financial
statements for the month end. Moreover enabling a company to start with
accurate books for the new month. In order to have these numbers accurately
recorded, closing entries must be made. Only the permanent accounts are
needed for the next period, therefore all temporary accounts, which include
the revenues, expenses, and dividends from the prior month, are adjusted so
that their ending balance for the month is zero, which starts the new month at
zero. To close those accounts, you move them to the income summary
account. The balance in the income summary account shows the net income
or loss. This amount would be used on the retained earnings statement,
which aides in producing the balance sheet.
RE:
closing Jessica Dallek
entries
3/14/2013 12:12:35 PM
To expand, I apologize for not including examples. An example of a
closing entry would be moving all revenue and expneses to the
income summary. Service revenues, and expenses due to salary,
rent, supplies, advertising would all be moved to the income
summary account. Then this income summary account would be
offset with the retained earnings account. Income Summary would
be debited and Retained Earnings Credited.
RE: TO
CLASS PLEASE
READ Kaswelda Carter
TO
CLASS closing
entries
3/14/2013 8:56:14 PM
The purpose of closing entries is to transfer net income or net loss and
dividends to retained earnings so the balance agrees with the retained
earnings statement.
The purpose of the income summary is when a company close total revenues
and total expenses to it.
RE: TO
CLASS PLEASE
READ Staci Pearcey
TO
CLASS closing
entries
3/14/2013 9:48:15 PM
Closing entries are made at year-end to zero out temporary accounts (revenue
& expense accounts and dividends) into permanent accounts (assets,
liabilities and stockholder equity) in order to carry forward permanent
account balances from one year to the next. Therefore the temporary
accounts will start at zero in the new accounting period and accumulate only
current year data because ultimately revenue, expenses and dividends are
retained earnings.
The income summary account is the account that all temporary accounts are
dumped into to produce a net result. The net profit or loss is then transferred
into retained earnings.
Examples of closing entries would be:
1. Crediting service revenue to the income summary account.
2. Debiting expenses to the income summary account.
3. Debiting retained earnings for all dividends paid.
4. Finally, crediting retained earnings for net profit (or debiting for net loss)
to zero out the income summary account and roll the net result of the
accounting period into the permanent accounts.
closing
entries Kimberly Warren
3/15/2013 3:18:36 PM
The income summary closes the expense and income accounts for the year.
Income Summary $5,000
Office Expense $5,000
Income $10,000
Income Summary $10,000
Income Summary $5,000
Owners/Sharehldrs Equity $5,000
To close Income Summary
RE: TO
CLASS PLEASE
READ Sara Rinaldo
TO
CLASS closing
entries
3/17/2013 8:44:45 PM
Modified:3/17/2013 8:45 PM
Closing entries transfer income statement account balances (summarized as
net income) and dividends to retained earnings. A temporary account called
income summary is used to create the closing entries. Examples of the entries
would be:
Close Revenue Account:
Debit Revenue
Credit Income Summary
Close Expense Account:
Debit Income Summary
Credit Expense
Close Net Income to Retained Earnings:
Debit Income Summary
Credit Retained Earnings
Close Dividends to Retained Earnings:
Debit Retained Earnings
Credit Dividends
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for business decision
making. (6th ed.).
Hoboken,
New Jersey: John C. Wiley & Sons, Inc.
Cash-basis
vs. Accrualbasis
accounting
Timothy Fry
3/13/2013 8:46:45 PM
Accrual-basis accounting recognizes revenues when they are earned and
expenses when they are incurred, not when cash actually changes hands.
Accrual-basis accounting usually gives a more accurate financial picture of
the business.
TO CLASS PLEASE
READ - TO
Professor Wilson
CLASS ---revenue
recognition
3/14/2013 6:37:17 AM
Class,
Thanks for the postings thus far this week. Please review my posting on closing
entries as I have asked additional questions and requested more detail.
Additionally, please consider the following:
If someone were to ask you, "what is so important about the revenue recognition
principle and matching principle?, how would you respond? What is the significance
of these two principles in the overall recording of business transactions and financial
reporting? Please look for opportunities to provide examples to help your fellow
students understand your position.
Prof Wilson
RE: TO
CLASS PLEASE
READ - TO Jessica Dallek
CLASS ---revenue
recognition
3/14/2013 12:28:41 PM
If someone were to ask me the importance of the revenue recognition and
matching principle, I would say that these are the antecedents and results of
accrual basis accounting which is ultimately the method of accounting for all
publically traded companies and recognized as THE method by GAAP. If I
were an incorporated business owner, say as a Wedding Coordinator, and I
earned revenue by providing services to my clients, I would recogine the
revenue I earned for the period in which I earned it. I have a client whose
wedding is in June, but I provided services in May to prepare for that June
wedding. I would record my revenue in my books in May. Any expenses I
incur at that time, such as favors, decorations, or invoices from other wedding
realted vendors ,should also be recorded as to offset (subtracted from) the
revenues, or matched with the revenues, which is the matching principle
concept.
I found an article which goes along with my position on this concept.
http://smallbusiness.chron.com/difference-between-revenue-recognitionmatching-principle-26112.html
RE: TO
CLASS PLEASE
READ Stacy Davis-Green
TO
CLASS ---revenue
recognition
3/14/2013 11:00:03 PM
Thanks Jessica, that was a very good and detailed example!!
RE: TO
CLASS PLEASE
READ - TO Staci Pearcey
CLASS ---revenue
recognition
3/14/2013 10:27:17 PM
The revenue recognition and matching principles are very important.
Recognizing when income is earned and accounting for it in the appropriate
period makes sure that revenues are stated correctly. If revenues are
recognized sooner than they should be, it can skew the balance sheet and also
create adjustments and/or refunds should the sale not go through as originally
planned. The same is true for expenses. Matching expenses that are incurred
in order to provide a service that generates revenue is extremely important in
determining the correct net profit. If expenses are recognized too soon, it can
lower net profit and vice versa. If expenses are purposely pushed out to
minimize the impact to the bottom line, it will eventually have the opposite
effect when closing the year out by creating even more of an impact on the
bottom line than would originally have done in the proper accounting period.
The bottom line is that GAAP outlines these principles for a reason. Going
back to the issue of consistency in reporting and the importance having
GAAP and IFRS regulations, being able to look at a company's financial
statements to compare them to their industry or evaluated their solvency is
easier when everyone is following the same principles...and when their
information is being reported properly.
RE: TO
CLASS PLEASE
READ Joshua Roque
TO
CLASS ---revenue
recognition
3/16/2013 12:53:39 PM
This is an interesting question, one I am sure that I might need further clarification after
trying to explain in my own words what the Revenue Recognition principle is. RRP
identifies an expense and revenue within any period of accounting for a business or
organization. This is also true for the matching principle. Both are used in concordance
of one another. I think that they both determine when something is either balance or
whether something is missing. For example, as we spoke about earlier in the
discussions, if an organization uses cash accounting, RRP and matching principle will
illustrate when an expense or credit is paid. This is important because it is necessary to
determine the time when this was paid and earned.
RE: TO
CLASS PLEASE
READ - TO Kelly Stewart
CLASS ---revenue
recognition
3/14/2013 10:54:06 PM
The revenue recognition principle is so important because it signifies entering
revenue when it has been completed or earned in the correct period. This
reassures balance to the financial statements and is also the method used by
GAAP. Services rendered or earned must be accounted for in the appropriate
periods with the matching reconciliation for that service.
RE: TO
Stacy Davis-Green
3/15/2013 12:07:16 AM
CLASS PLEASE
READ - TO
CLASS ---revenue
recognition
What is so important about the revenue recognition principle and the
matching principle? I would answer that by saying that they both are
principles that fall under the accrual basis of accounting. The Matching
principle requires that expenses be matched with revenue while revenue
recognition is revenue recognized as soon as a product has been sold or a
service has been performed within the appropriate time frame. An example
that would interrelate both principles i think is, An attorney that defended you
March 14, 2013 on trial in court..his services should be reported in the same
time frame that he researched, and gathered evidence, and then the
revenue(income) should be recognized as soon as his services of defending
you has been done.
RE: TO
CLASS PLEASE
READ Professor Wilson
TO
CLASS ---revenue
recognition
3/15/2013 5:49:05 AM
Stacy, et al (and rest of the class),
Thanks for the postings and discussion regarding revenue recognition
principle.Good job explaining what it is and how it works.
Diving a little further into the topic...Sometimes, it is just not
possible to directly match expenses with revenues because there is no
cause-and-effect relationship. What do you do with such
expenditures? How or when do you record them if you cannot match
them with any corresponding revenues?
Think about some examples of expenses with no cause and effect
relationship and list them as you discuss the proper acocunting
treatment.
Prof Wilson
RE: TO
Rachid Khalfaoui
3/15/2013 7:36:04 AM
CLASS PLEASE
READ TO
CLASS ---revenue
recognition
HI pr Wilson and class,
In accrual accounting, expenses are recognized when
goods are transferred or services rendered. In cash
accounting expenses are recognized when cash is paid, no
matter when obligations are incurred. If no cause and
effect relationship exists, costs are recognized as
expenses when they have been used up or consumed. The
prepaid expenses are not recognized as expenses but as
assets until qualifying conditions are met to be
recognized as expenses. In case of no relationship with
revenue can be proved costs are immediately recognized
as expenses. The matching principle is an effective way
to evaluate profitability and reduces noise from timing
mismatch between when costs are incurred and when
revenue is realized and recognized.
Source: http://en.wikipedia.org/wiki/Matching_principle
Rachid
RE: TO
CLASS PLEASE
READ Makiko Kishida
TO
CLASS ---revenue
recognition
3/15/2013 8:29:52 AM
Hi Prof Wilson, Class,
This was the question that had me stuck for a little while
until I found the answer in the text. In my job, I process
expenses that don't necessarily have an obvious revenue to
match, such as business travel expenses, business meals, or
cell phone usage as some simple examples. Of course, by
traveling to meet with potential clients/M&A
targets/existing subsidiaries, there is income potential, but
not a direct service fee or sale that I can tie these expenses
to. We are always told to account for expenses such as these
in the month they are incurred. I now know that this is a part
of the matching principle. I think of it as expenses are
matched with the period they are incurred, rather than
revenue.
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO
CLASS ---revenue
recognition
3/15/2013 9:49:02 AM
I agree with Makiko... I was trying to rack my brain for how
I would apply this to my job. I actually do not have income,
as a government entity, we are allocated funding. And while
there is a source for revenue (taxes and local goverment
allocations) we start with a budget and expense out all
orders until the end of the fiscal year. So, since there is no
direct relation between our expenses and the source of
revenue as we are allocated funding, this would be a good
example of how there is no cause/effect relationship
between expenses and revenues. In my situation, I record
each expense as it is offset to the original balance allocated.
I record them by date and each monthly period we review
our expenses and average spending by month...
RE: TO
CLASS PLEASE
READ Zach Monroe
TO
CLASS ---revenue
recognition
3/15/2013 4:12:34 PM
I got to four or five different marketing conferences per
year. There are conference fees, travel expenses, and even
equipment expenses to provide me with computers, mobile
devices, and other electronics that help me do my job while
on the road. There is long term correlation between what I
learn at these conferences and eventually being able to apply
that knowledge to my job, which in turn should eventually
impact the business. However, you can't really look at the
cost of attending a conference and be able to say that you
immediately gained "X" amount of revenue because you
attended. I know in the case of my company, these
conference expenses are accounted for in the month they
occur in.
RE: TO
CLASS PLEASE
READ Staci Pearcey
TO
CLASS ---revenue
recognition
3/17/2013 10:15:05
AM
Expenditures that do not show a cause- and -effect
relationship with service revenues are usually recorded in
the accounting period that they occurred. If it can not be
directly associated with revenue generation, then it can be a
G&A expense or classified to research and development.
Some examples can be travel expenses to see a potential
client that does not materialize in service revenue, the
depreciation of equipment over a specific period of time
where it can create revenue (although you cannot directly
match the costs to revenue), routine maintenance expenses,
utilities, and in my company's case: corporate salaries (we
do not generate or contribute to the generation of revenue).
RE: TO
CLASS PLEASE
READ - TO Elizabeth Smith
CLASS ---revenue
recognition
3/15/2013 7:45:46 PM
Both revenue recognition principle and matching principle are important in the accrual
accounting. It reports when revenues are earned over a period of time. Investors and
business partners pay attention to these 2 principles.
http://www.wisegeek.com/what-is-the-revenue-recognition-principle.htm
Revenue recognition follows processes to record income data. Matching Principles ties
the income generated during a time period.
An example is showing depreciation of vehicles for a company.
http://smallbusiness.chron.com/difference-between-revenue-recognition-matchingprinciple-26112.html
RE: TO
CLASS PLEASE
READ - TO Kelly Stewart
CLASS ---revenue
recognition
3/15/2013 11:18:55 PM
The matching principle is so important because it ties up all the loose ends in
an accrual basis accounting situation, which is most situations because it is
the method suggested by GAAP. Revenues and expenses related to that
revenue must be recorded due to the effect they have on each other. the
matching principle in essence matches revenue in a given period with
expenses incurred related to that revenue.
I found this to help me tie the idea of Revenue recognition and the matching
principle together:
"Connection
While revenue recognition has nothing to do with the matching principle, both
concepts often interrelate. Basically, revenue recognition provides a window into the
rules a business follows to post income data. However, these rules indirectly relate
to expense recognition because the organization must track both revenue and cost
items to solve its profitability equation. Regulatory guidelines also connect revenue
and expense recognition when referring to the matching principle. These edicts are
as diverse as generally accepted accounting principles (GAAP), international
financial reporting standards (IFRS) and rules from the U.S. Securities and
Exchange Commission."
http://smallbusiness.chron.com/difference-between-revenue-recognition-matchingprinciple-26112.html
RE: TO
CLASS PLEASE
READ - TO David Neville
CLASS ---revenue
recognition
3/16/2013 7:06:36 AM
"Revenue recognition covers the tools, procedures and guidelines a business
follows to record income data. Matching revenue items with operating
expenses enables financial managers to accurately calculate how much money
a business makes on a project or product, taking into account cash and
noncash expenses, such as depreciation and amortization."
What Is the Difference Between Revenue Recognition & Matching ...
http://smallbusiness.chron.com/difference-between-revenuerecognition-matching-principle-26112.html - 37k
So in other words, RR is the guide to record keeping and MP is
actually matching cash flow(debits and credits).
RE: TO
CLASS PLEASE
READ - TO Sara Rinaldo
CLASS ---revenue
recognition
3/16/2013 8:56:18 PM
Revenue recognition, recognizing income when it is earned, and the matching
principle, recognizing expense when it is incurred, is extremely important in
providing straightforward financial performance information. If a company
performs services in one year - meaning they earn revenue and incur the
expense of employees' salaries in that year - but get paid for the service in the
next year, cash basis accounting would provide misleading information. This
is because they would show a loss from the salary expenses incurred in year 1
and they would show net income from the service revenues earned in year 2.
In accrual basis accounting, you would match the salary expenses and service
revenues in year 1 to show the net profit. This means that there would not be
a swing from loss to net income and the information would not be misleading.
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for business decision
making. (6th ed.). Hoboken, New Jersey: John C. Wiley & Sons, Inc.
TO
CLASS PLEASE
READ TO
Professor Wilson
CLASS ---adjusted
trial
balance
3/16/2013 8:10:10 AM
Class,
As we work through the 2nd weekend of class, please consider the following:
What is the importance of an adjusted trial balance in the overall accounting cycle?
Prof Wilson
RE: TO
CLASS PLEASE
READ TO
CLASS -- Jessica Dallek
-adjusted
trial
balance
3/16/2013 5:19:30 PM
Good evening everyone,
Ultimately, the adjusted trial balance helps us to prepare the financial
statements for the month or year. Since adjustment entries are made and the
accounts are in their normal balance state, the adjusted trial balance shows
that all accounts are in balance and that credits and debits are in their proper
places.
RE: TO
CLASS PLEASE
READ TO
CLASS - Justin Noel
--adjusted
trial
balance
3/16/2013 6:10:29 PM
I like this explanation and even more so the importance of this is to
make sure that before you close things out this gives you
the opportunity to ensure that all of the entries made are
properly categorized and being credited or deducted from the proper
accounts. Once this is done you can get the adjusted balances and it
shows all of the credits and debits and ensures that they are
being handled properly.
RE: TO
Geri Waldbillig
3/16/2013 5:44:31 PM
CLASS PLEASE
READ TO
CLASS --adjusted
trial
balance
Once the initial trial balance is created and adjustments made for accuracy
and reporting, another test (trial) run is complete in order to look for any
additional errors or need for further adjustment. Once a satisfactory adjusted
trial balance is obtained the data is used to create the financial statementsincome statement, retained earnings statement and balance sheet.
RE: TO
CLASS PLEASE
READ TO
CLASS -- Lisa Childs
-adjusted
trial
balance
3/16/2013 9:19:50 PM
An adjusted trail balance is a summary of all account balances in the general
ledger with the adjustments shown in a separate column.
RE: TO
CLASS PLEASE
READ TO
CLASS - Professor Wilson
--adjusted
trial
balance
3/17/2013 7:23:22 AM
Lisa, et al (and rest of the class),
Thanks for postings and good comments regarding "what is" adjusted
trial balance.
As we wrap up week 2 of class, let's end the week discussing the
following:
- how do you get comfort that adjusted trial balance is correct? Or
that there is no basic accounting errors in it ??
- Once you have adjusted trial balance and you feel it is correct,
what can you do next with information? Can you make financial
statements from the information?
Prof Wilson
RE: TO
CLASS PLEASE
READ TO
CLASS - Zach Monroe
--adjusted
trial
balance
3/17/2013 9:54:36 AM
You actually can prepare financial statements from the
adjusted trial balance. The three financial statements that
can be prepared based on the information in the adjusted
trial balance are the Income Statement, Balance Sheet, and
Retained Earnings Statement. The revenues and expenses in
the adjusted trial balance can be used to prepare the income
statement. The assets and liabilities and stockholders' equity
in the adjusted trial balance can be used to prepare the
balance sheet. And if you take the retained earnings at the
beginning of the month and add net income and subtract
dividends, you can prepare the retained earnings statement
from the adjusted trial balance.
RE: TO
CLASS PLEASE
READ TO
CLASS - Joshua Roque
--adjusted
trial
balance
3/17/2013 11:03:32
AM
Hello Professor,
I am going to start with the second question first. It
is possible to use the adjusted trail balance to create
and make a financial statements sheet. The
information that is gathered within the trail balance
sheet can be used to determine the financial
statement findings. The part that we need to
determine though is indicating whether the
information within the adjusted trial balance is
correct. Thus, let me go back to the first question. I
guess that a period of comfort can be determined if
the balance evens out. Now this requires us to look
at the numbers and ensure that they make sense.
Another thing that one can do to determine if it is
error free is to cross reference the information with
the income statement. If we add all the figures
together and it matches, then this is a way to
indicate that the adjusted trail balance is accurate.
RE: TO
CLASS PLEASE
READ TO
CLASS - Darnell Flax
--adjusted
trial
balance
3/17/2013 8:08:48
PM
I to agree with Zach however to the first question I
feel that the only way to comfort that adjusted trial
balance is correct is making sure your balances are
equal, and also over looking and make sure
accounts are posted correctly in proper accounts and
no accounts are over posted because these seem to
be the most common errors that occur.
RE: TO
CLASS PLEASE
READ - Staci Pearcey
TO
CLASS ---
3/17/2013 10:45:50
AM
adjusted
trial
balance
I imagine that after some time reviewing and or entering the
transactions into the accounting system, you begin to have
familiarity with the business ebb and flow. Certainly in my
job, I have become familiar with expenses not only for the
corporate office but for all of our retail locations as well. I
can identify items that are off trend and investigate them,
especially when it comes to capital expenditures and supply
expenses. As I am the last line of sight before presenting the
financials to the President, I make sure that I am able to
explain increases/changes or abnormalities in revenue and
expenses.
Since I generate and verify all adjustments to the trial
balance, and have done so for quite some time, I feel
comfortable moving forward to create the financial
statements from this information, given that the adjusted
trial balance contains all of the necessary information to do
so.
RE: TO
CLASS PLEASE
READ TO
CLASS - Jessica Dallek
--adjusted
trial
balance
3/17/2013 11:15:25
AM
I agree with Zach, Staci, and Joshua on their answers... But
to elaborate: The adjusted trial balance is run after
adjustment entries are made for the period, thus, you have
already run a trial balance before the adjusted trial balance.
You cannot be 100% certain that there will be no errors in
the adjusted trial balance, but with careful review and
analysis of the transactions made in the ledger, upon review
the adjusted trial balance, especially if you have a trained
eye for the details of those accounts, you can move on to
preparing the financial statements. You would create the
income statement from revenue and expense accounts thus
producing the net income, which would be transferred to the
statement of retained earnings. On the statement of retained
earnings, you would incorporate any balances from common
stock accounts and the net income minus the dividends.
From there we could create the balance sheet and list all the
permanent account balances such as assets and liabilities and
incorporate the retained earnings from the retained earnings
statement.
---adjusted
Kimberly Warren
trial
balance
3/17/2013 7:33:03 PM
The Trial Balance is correct if your accounts balance. Dr =
Cr.
Yes you can do the Income Statement, Statement of
Retained Earnings and the Balance sheet.
RE: TO
CLASS PLEASE
READ TO
CLASS -- Kristin Muchowski
-adjusted
trial
balance
3/17/2013 9:32:40 AM
An adjusted trial balance is a listing of all the account titles and balances that
are in the general ledger after the adjusting entries for an accounting period
have been posted to the accounts. The importance of the adjusted trial
balance is so that the company can make sure that the total amount of debit
balances in the general ledger is the same as the total amount of credit
balances.
RE: TO
CLASS PLEASE
READ TO
Staci Pearcey
CLASS --adjusted
trial
3/17/2013 10:33:03 AM
balance
The adjusted trial balance is an important key in the overall accounting cycle
simply because it is the vehicle used to create the financial statements. By
starting with the trial balance and making adjusting entries for accruals,
deferrals and other corrections, you can verify that all debits equal credits and
begin the preparation of the financial statements.
RE: TO
CLASS PLEASE
READ TO
CLASS -- Stacy Davis-Green
-adjusted
trial
balance
3/17/2013 11:28:30 AM
There are three main points that we need to know and keep in mind about the
adjusted trial balance...

WHAT IS IT?
1. An Adjusted Trial Balance is to prove and show that the total amount
of the debit balances in the general ledger is equal to the total amount
of the credit balances after all adjustments have been made.

WHY IS IT IMPORTANT?
1. The Adjusted Trial Balance is important because, the financial
statements are prepared directly from it...adjustment trial balance
provides the primary basis for the financial statements.

WHEN IS IT USED?
1. Adjusted trial balance is prepared after the adjusting entries have
been journalized and posted.
RE: TO
CLASS PLEASE
READ - Sara Rinaldo
TO
CLASS --
3/17/2013 8:49:45 PM
-adjusted
trial
balance
The importance of the adjusted trial balance on the overall accounting cycle is
that the financial statements can be prepared straight from the adjusted trial
balance.
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for business decision making.
(6th ed.). Hoboken, New Jersey: John C. Wiley & Sons, Inc.