Principles of Revenue and Expense Recognition: A Guide to Proper

Revenue/expenserecognition principle Revenues/expenses should be recognized when earned/incurred, regardless when cash is received/paid Matching principle Proper matching of revenues earned during accounting period, with expenses incurred to produce those revenues Reasons to adjust trial balance Report al expense, accurately report the assets/ expenses on the balance sheet, some assets/expenses may not be used up/ incurred during the accounting period. Generally done at the end of each fiscal year How to record adjustments Supplies, a debit asset when purchased. The amount of supplies used is recorded at the end of the month. Adjusted entry should be debit supplies expense for the amount used, and credit total supplies for the amount used. Prepaid insurance, an asset is debited because policy is expected to provide future benefits, adjusting entry, debit insurance expense for month total, and credit pre paid insurance for the same amount Wages expense, is debited for amount in unpaid wages and wages payable is credited Adjusting entries are posted to the general ledger in the same manner, except "adjusting" is written in the item column in general ledger Order of 10 column worksheet, trial balance, adjustments, adjusted trial balance, income statement, balance sheet. Three major end of period adjustments, journalizing adjusting entries, preparing financial statement, journalize closing entries Income statement formatting reminders Heading includes; name of company, title of statement, accounting period ended, revenues are listed first, expenses are listed second, owner equity; current assets, plant assets and equipment are listed first, current liabilities then long term liabilities Operating cycle start with cash, purchase supplies, provide services for cash, collect, back to collect Temporary accounts Revenue, expense, and drawing accounts debit revenues credit income summary for same amount Expenses; debit income summary for total amount of all expenses, credit each expense account Owner capital; income summary will either be credit (net income) or debit (net loss). If there is a net income debit income summary to 0, credit owners capital for same amount Drawing; Debit capital credit drawing Order financial statements should be completed; trial balance, adjusted trial balance, income statement, balance sheet, statement of owner equity