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BMGT220 Chapter 3 NotesAdjusting Process9-22-13subscription revenue= recorded when earned (earned when service = delivered tocustomer)- many times cash= received before service is provided;  making it unearned revenueaccounting period concept: divide economic life of the business into time periods and requires that revenues and expenses be reported in the proper period GAAP: Generally Accepted Accounting Principles**GAAP requires accrual basis of accountingaccrual basis of accounting: revenues and expenses are reported in the income statement in the period in which they’re earned or incurredrevenue recognition concept: supports providing revenues when the services areprovided to customersmatching concept/principle: expenses and revenues occurring at same time matched against each other so net income/loss for that period is properly reported on INCOME STATEMENTcash basis of accounting: revenues and expenses are reported on income statement in period where cash is received or paid (** net income = difference between cash receipts (revenues) and cash payments (expenses)- small business more likely to use cash basisadjusting process: analysis and updating of accounts at the end of the period before the financial statements are preparedadjusting entries: journal entries that bring the accounts up to date at the end of accounting period- ALL adjustment entries affect AT LEAST 1 income statement and 1 balance sheet account- adjustment entries will always involved revenue/expense accounts AND assets/liability accounts4 Basic Types of Accounts Requiring Adjusting Entries:1. prepaid expenses2. unearned revenue3. accrued revenue4. accrued expenses- prepaid expenses: assets when cash is paid- unearned revenue: liabilities when cash is received- accrued revenue: unrecorded revenues that have been earned and for which cash has yet to be received- accrued expenses: unrecorded expenses that have been incurred and whichcash has yet to be paidfixed assets (aka plant assets): long term or relatively permanent tangible assets such as equipment, machinery, buildings, and land, that are used in normal business operations and that depreciate over time (WITH THE EXCEPTION OF LAND!!)- fixed assets are a type of long-term, pre-paid expensedepreciation: systematic periodic transfer of the cost of a fixed asset to an expense account during it’s expected useful lifedepreciate: to lose usefulness (all fixed assets but land do)depreciation expense: depreciation expense account = increased (debited) for amount of depreciation, fixed asset account = not decreased (credited)accumulated depreciation: the contra asset account that’s credited when recording the depreciation of a fixed assetcontra (asset) accounts: an account offset against another accountbook value of the asset/net book value: difference between cost of a fixed asset and it’s accumulated depreciation depreciation= ALLOCATION method; not VALUATION method (why market valueof fixed asset is different from book value)adjusted trial balance: trial balance prepared after all the adjusting entries have been posted if total credits and total debits are not equal; an error has occurred.Vertical analysis: an analysis that compared each item in a financial statement witha total amount within the same statement in vertical analysis; each asset item = state as % of the total assets each liability & stockholder equity = expressed as a % of total liabilities and stockholder equity on income statement: each revenue and expense = expresses as % of total revenues or fees earnedKey Chapter 3 Summaries:- updating of accounts at end of accounting period = adjusting process- summary of adjustments- (including type of adjustment)- (reason for adjustment)- (adjusting entry)- (effect of omitting an adjustment on financial

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UMD BMGT 220 - Chapter 3

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