Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

OVERVIEW

In accordance with the revenue recognition principle, revenue is to be recognized (reported) in the period in which the performance obligation is satisfied. In accordance with the expense recognition (matching principle), the expenses incurred in generating revenues should be recognized in the same period as the revenues they helped to generate. Adjusting entries are often required so that revenues and expenses are reflected on an accrual-basis of accounting (revenues recognized when services are performed and expenses recognized when incurred) rather than on a cash basis of accounting. Therefore, adjusting entries reflect the accruals and deferrals of revenues and expenses. Adjusting entries are simply entries required to bring account balances up to date before financial statements can be prepared. The failure to record proper adjustments will cause errors in both the income statement and the balance sheet.