Adjusting the Accounts Flashcards
time period assumption / periodicity assumption
Accountants divide the economic life of a Business into artificial time periods
Interim periods
time periods which are Shorter than 12 months, e.g. Monthly and quarterly time periods
fiscal year
Accounting time period is one year in legth
calendar year
January 1 to December 31
Possible reasons why fiscal year differ from calendar year
- no legal requirement in EU that fiscal year and calendar has to match
- Industry specifics
- earnings specifics or
- legal specifics
Cash-Basis Accounting
revenues recognized when cash is received, expenses are recognized when cash is Paid
It is not in accordance with IFRS and most local GAAPs, although some GAAPs may allow it as simplifications for some companies e.g. really small firms
Accrual-Basis Accounting
Transactions recorded in the periods in which the Events economically occur. Revenues are recognized when Services are performed and expenses are recognized when incurred
Revenue Recognition Principle
recognize Revenue in the Accounting perod in which the Performance Obligation is satisfied
Expense Recognition Principle
match expenses with revenues in the period when the Company makes efforts to generate those revenues. Efforts shuld be matched with results.
Adjusting Entries
entries which are made at end of an accounting period to bring the balance sheet and income statement up to date on the accrual basis of accounting
Prepaid expenses
expenses Paid in cash before they are used or consumed
unearned earnings
cash received before Services are performed
accrued revenues
Service revenues performed but not yet received in cash or recorded
accrued expenses
expenses incurred but not yet Paid in cash or recorded
adjusted Trial balance
prepared after all adjusting entries are journalized and posted to prove the equality of debit and credit balances in the ledger. it is the Primary Basis for the preparations of financial statements
