Problem Solving Survival Guide Volume I: Chapters 1-12 to accompany Accounting Principles, 11th Edition

CHAPTER 3

ADJUSTING THE ACCOUNTS

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.

SUMMARY OF LEARNING OBJECTIVES

1. Explain the time period assumption. The time period assumption assumes that the economic life of a business is divided into artificial time periods of equal length. Another name for this assumption is the periodicity assumption.
2. Explain the accrual basis of accounting. Accrual basis accounting means that companies record events that change a company's financial statements in the periods in which these ...