Chapter Outline
B. Work sheet Applications and Analysis – does not substitute for
financial statements. It is a tool used at the end of the period to help
organize data and prepare financial statements.
XI. Appendix 3C—Reversing Entries
A. Accounting without reversing entries
1. To construct proper entries when the cash receipt/payment
occurs in the new accounting period, the related accrual or
deferral adjustment must be recalled and considered.
2. With or without reversing entries use, it will yield the same
result.
B. Accounting with reversing entries (an optional step)
1. Linked to asset and liability account balances that arose from
the accrual of revenues and expenses.
2. Purpose is to simplify recordkeeping.
3. They are prepared after closing entries and dated the first day
of the new period.
4. Procedure is to transfer accrued asset and liability account
balances to related revenue and expense accounts creating an
abnormal balance in these accounts.
5. The full subsequent cash receipts (and payments) are recorded
as increases in revenue (and expense) accounts creating a net
balance equal to the amount earned or incurred in that period.
Notes
VISUAL #3-1
ACCRUAL BASIS ACCOUNTING
(Follows GAAP)
Requires that the
Income Statement
(for a period)
report
ALL REVENUES EARNED in period (Collected or Not)
Minus ALL EXPENSES INCURRED in period (Paid or Not)
Equals Net Income or Net Loss for the period
ACCOUNTS MUST BE ADJUSTED TO FOLLOW PRINCIPLES
GAAP
Revenue
Recognition
GAAP
Periodicity
GAAP
Expense
Recognition
(or Matching)
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Education.
3-13
VISUAL #3-2
DEFERRALS
The converse of statements in Visual #3-1 also applies.
Revenue not earned or expense not incurred results in Deferrals*
UNEARNED = LIABILITY *
A REVENUE not earned cannot be shown, even if collected.
An EXPENSE not incurred cannot be shown, even if paid.
PREPAID = ASSET *
*We defer or postpone the reporting of the collected revenues
(as revenues) and prepaid expenses (as expenses) until the
revenue is earned and the expense is incurred.
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Education.
3-15
VISUAL #3-3
ADJUSTMENTS
TYPE
GENERALIZED*
ENTRY
AMOUNT
1A. Prepaid (deferred)
expenses—initially recorded as
assets
Dr. _________ Expense
Cr. the Asset* acct.
Amount used, or
consumed, or expired
1B. Prepaid (deferred)
expenses—that are depreciable
(plant assets)
Dr. Depreciation Expense
Cr. Accumulated
Depreciation
Portion of cost
allocated to this period
as depreciation
1C. Prepaid (deferred)
expenses—initially recorded as
expenses (alternate treatment—
appendix)
Dr. the Asset** acct.
Cr. ________ Expense
Amount left, or
not consumed, or
unexpired
2A. Unearned revenues—
(revenue received in advance)
initially record as liability
(unearned account)
Dr. Unearned ________
Cr. the Revenue** acct.
Amount earned to date
2B. Unearned revenues—
(revenue received in advance)
initially recorded as a revenue
(alternate treatment—
appendix)
Dr. the Revenue** acct.
Cr. Unearned________
Amount still not
earned
3. Accrued expenses—
(expenses incurred but not yet
recorded)
Dr. _________ Expense
Cr. _________ Payable
Amount accrued
4. Accrued revenues
(revenues earned but not
yet recorded)
Dr. ________ Receivable
Cr. the Revenue** acct.
Amount accrued
*Note: (1) Each adjustment affects a Balance Sheet Account and an Income
Statement Account and (2) CASH NEVER appears in an adjustment.
**Title or account name varies.