Formally recording an item in the financial statements of an entity, such as an asset, liability, revenue, or expense.
Quantification of the economic effects of the item on the entity.
A system of accounting in which revenues are recognized when cash is received and expenses when cash is paid.
The amount of cash, or its equivalent, that could be received by selling an asset currently.
A system of accounting in which revenues are recognized when earned and expenses when incurred.
Inflows of assets or settlements of liabilites from delivering or producing goods, rendering services, or conducting other activities.`
The association of revenue of a period with all of the costs necessary to generate that revenue.
Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities.
Journal entries made at the end of a period by a company using the accrual basis of accounting.
Types of Adjusting Entries
Deferred Expense: Cash paid before expense is incurred. (Ex. prepaid rent, prepaid insurance, office supplies, property and equipment.)
Deferred Revenue: Cash received before revenue is earned. (Ex. Insurance collected in advance, Subscriptions collected in advance, Gift certificates.)
Accrued Liability: Expense incurred before cash is paid. (Ex. Payroll, Taxes, Interest.)
Accrued Asset: Revenue earned before cash is received. (Ex. Rent, Interest).
Steps in the Accounting Cycle
1. Collect and analyze info 2. Journalize transactions 3. Post transactions to general ledger 4. Prepare work sheet 5. Prepare financial statements 6. Record and post adjusting entries 7. Close the accounts
A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries.
Serve two purposes: 1. to return the balances in all temporary or nominal accounts to zero to start the next accounting period. 2. to transfer the net income(or net loss) and the dividends of the period to the Retained Earnings account.
Example of a journal entry of Deferred Expense
Prepay rent on office space for one year on September 1.