Basic Account: Chapter 3: Accounting Cycle.

The Accounting Concept
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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
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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.

Financial Statements
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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
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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.