The Accounting Concept
Accounting Period Concept: When accountants prepare financial statements, they assume that the economic life of the business can be divided into the time periods.
Cash Basis: Revenues and expenses are reported in the income statement in the period in which cash is received or paid.
Accrual Basis: Revenues are reported in the income statement in the period in which they are earned.
Revenue Recognition Concept: Revenues are reported when the services are provided to customer and cash may or may not be received.
Matching Concept : The accounting concept that supports reporting revenues and related expenses.
Nature of Adjusting Process
Adjusting Entries: The journal entries that bring the accounts up to date at the end of accounting period. Adjusting entries will always involve a revenue or an expense account and an asset or liability account.
Prepaid Expenses: Or deferred expenses, are items that have been initially recorded as assets but are expected to become expenses over time or through the normal operation of the business.
Unearned Revenue: Or deferred revenues, are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the business.
Accrued Revenues: Or accrued assets, are revenues that have been initially incurred but have not been recorded in the accounts.
Accrued Expenses: Or accrued liabilities, are expenses that have been initially incurred but have not been recorded in the accounts.
Income statement: Is prepared directly from the adjusted trial balance.
Statement of Owner's Equity: Is the balance of the owner's capital account.
Balance sheet: Assets, liabilities and owner's equity are presented.
Assets: Commonly divided into classes for presentation which are:
1. current assets
2. fixed assets.
Liabilities: Two common classes of liabilities are:
1. current liabilities
2. long-term liabilities
Owners equity: The owner's right to the assets of the business
Adjusting and Closing Entries
Real Accounts: Relatively permanent, carried forward from year to year.
Temporary Accounts: Or nominal accounts, accounts report amounts for only one period and not carried forward from year to year; account incomes, account expenses and account withdrawals.
Closing Process: Entries that transfer the balance of temporary accounts to the owner;s equity.