ACCT200 Lecture 4 Outline of Last Lecture II. Accounting Information SystemIII. The AccountIV. Steps in the Recording ProcessV. The Trial BalanceOutline of Current Lecture VI. Timing IssuesVII. The Basics of Adjusting EntriesCurrent LectureChapter 4Timing IssuesAccounts divide the economic life of a business into artificial time periods (periodicity assumption)- Generally a month, a quarter, or a year- Fiscal year vs. calendar yearo Fiscal year is an accounting time period that is one year long The revenue recognition principle:- Companies recognize revenue in the accounting period when earned, provided, work done, completed, performedTiming Issues Example:- A customer booked a ticket with US Airways on January 13 and paid cash to US Airways on February 14. The flight took place on April 15. According to the revenue recognition principal, in which month should US Airways recognize this revenue?o April 15 Because it is received/recognized when the work is doneIllustration:- Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim andpay for their clothes until the first week of July. The journal entries for June and July would be:o June- A/R 100 A/RThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Service Rev 100 June 100| 100 July1 (ace rule of acct)o July- Cash 100A/R 100Expense Recognition Principle- Match expenses with revenues in the period when the company makes efforts to generate those revenues- “Let the expenses follow the revenues”Accrual versus Cash Basis of Accounting- Accrual-Basis Accountingo Transactions recorded in the periods in which the events occuro Revenues are recognized when services performed not when cash is receivedo Expenses are recognized when incurred not when cash is paid- Cash-Basis Accountingo Revenues are recognized only when cash is received (Rev=cash)o Expenses are recognized only when cash is paid (Exp=cash)o Prohibited under generally accepted accounting principles (GAAP)The Basics of Adjusting EntriesAdjusting entries:- Ensures that using/following revenue recognition and expense recognition are required every time financial statements are prepared- Includes one income statement account and one balance sheet account- Never includes cashTypes of Adjusting EntriesDeferrals:- Prepaid expenses: record the expense before it is usedo Prepaid assets increases, cash decreases = adjustments use up the prepaid asset- Unearned revenues: get cash= record as a liability to do the work latero Liability increases, cash increases = adjustment change in liability + revTrial Balance:- Each account is analyzed to determine whether it is complete and up to dateAdjusting Entries for DeferralsDeferrals are either:- Prepaid expenses (prepaid insurance. Supplies/rent)- OR unearned revenuesAdjusting Entries for “Prepaid Expenses”Payment of cash that is recorded as an asset because service or benefit will be received in the future, such as:- Prepaid insurance 12000Cash 12000- Cash payment before expense recorded- Prepayments often occur in regards to:o Insuranceo Supplieso Advertisingo Rento Equipmento BuildingsPrepaid asset = decrease in credit = shows that it is usedExpense = increase in debitDepreciation- Buildings, equipment, and motor vehicles (long lived assets) are recorded as assets rather than an expense in the year acquired- Companies report a portion of the cost of a long lived asset as an expense (depreciation)during each period of the asset’s useful life- Depreciation does not attempt to report the actual change in the value of the asseto No change in fair market value (FMV)Statement Presentation- Accumulated depreciation- equipment is contra asset (normal balance: credit)- Appears just after the account it offsets (equipment) on the balance sheetAdjusting Entries for “Unearned Revenues”Receipt of cash recorded as a liability before services are performed, such as:Cash 5000Unearned Service Revenue 5000Cash receipt before revenue recordedUnearned revenues often occur in regards to:- Season tickets- Airline tickets- Gift cards- Customer depositsLiability: adjustment = decrease in liability = debitRevenue: adjustment = increase in revenue =