Chapter 4: Adjusting Accounts

Chapter 4

  • Created by: Jane Lee
  • Created on: 24-05-11 06:09

What is time period assumption?

Time period assumes that the economic life of a business can be divided into artificial time periods.

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Revenue Recognition Principle

Under accrual accounting. That is when an increase in future economic benefits has occurred. 

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Expense Recognition Principle

Under accrual accounting: that is when a decrease in a future economic benefit has accrued.

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Why is adjusting entries needed?

Adjusting entries are made at the end of an accounting period. They ensure that revenue is recorded in the period in which it is earned and that expenses are recognised in the period in which they incurred. 

Remember no cash is involved. It normally involves one income statement account and one balance sheet account. 

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Prepaid expenses :For when prepaid expense has been made and adjustments have to be made.

Debit- expense

Credit- asset (prepaid thing)

Depreciation: For when asset is bought and adjustments have to be made

Remember: (cost-residual value)/life value or the straight line method

Debit -depreciation expense

Credit- Accumulated Depreciation

Unearned Revenue: For when unearned revenue has been earned.

Debit-Unearned Revenue

Credit- Revenue

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Expenses: For when expenses that hasn't have been paid for. 

Debit- expense


Revenue: For when revenue hasn't been received yet.

Debit-accounts receivable


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Adjusted trial balance

An adjusted trial balance shows the balances of accounts including those that have been adjusted at the end of an accounting period. 

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