Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University The accrual basis of accounting matches revenues earned with expenses incurred The cash basis matches revenues received with expenses paid. It is not satisfactory r mos results in financial statements that are not comparable from period to period, except when the amounts of prepaid, unearned and accrued items are not material Cash basis accounting does not make adjustments for prepaid expenses, accrued expenses, unearned revenues, and accrued revenues. Only accrual accounting with its emphasis on matching, and hence the need for adjustments, is acceptable under gaap Type of Adjusting Entries There are four types of adjustment Accruing unrecorded revenues Converting liabilities to revenues A Converting assets to expenses Accruing unrecorded revenues is to accrue revenues and record the related assets. Since the revenues are earned in one period and cash received in the other period so adjustment is necessary Example: On Jun 1, 2004, Smith Inc invests $100,000 for a bonds which pays 5% interest per year. Smith Inc. will not receive the interest until March 31 2005. On December 31, 2004, Smith, Inc. need to make the following entry for the interest earned already The adjusting try for the adjustment will be Dr Interest Receivable 2916.6 Cr Interest revenue 2916.67 Accruing unrecorded expenses is to accrue incurred expenses and record the related liabilities Example: On the year-end, Dec. 31, 2004, Smith Inc,s employees have earned total wages of $35,000 for the Monday, but Smith Inc. will not pay the wages until Sth of next month. So at the end of the accounting period, Smith need to make the following entries to accrued the wage expenses The adjusting entry will be Dr. Wages Expense 35000 Cr Wages Payable 35000 Converting liabil ities to revenues is to recogn ize as revenues the earned portion of unearned revenue liabilities Example: On Oct. 1, 2004, Smith Inc. signed a contract for idir service to Cone. Smith received $50000 for the service to be provided. At the end ofTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University The accrual basis of accounting matches revenues earned with expenses incurred. The cash basis matches revenues received with expenses paid. It is not satisfactory for most businesses because it results in financial statements that are not comparable from period to period, except when the amounts of prepaid, unearned, and accrued items are not material. Cash basis accounting does not make adjustments for prepaid expenses, accrued expenses, unearned revenues, and accrued revenues. Only accrual accounting, with its emphasis on matching, and hence the need for adjustments, is acceptable under GAAP. Type of Adjusting Entries There are four types of adjustment: Accruing unrecorded revenues Converting liabilities to revenues Accruing unrecorded expenses Converting assets to expenses Accruing unrecorded revenues is to accrue revenues and record the related assets. Since the revenues are earned in one period and cash received in the other period so adjustment is necessary. Example: On Jun 1, 2004, Smith Inc. invests $100,000 for a bonds which pays 5% interest per year. Smith Inc. will not receive the interest until March 31, 2005. On December 31, 2004, Smith, Inc. need to make the following entry for the interest earned already The adjusting try for the adjustment will be: Dr. Interest Receivable 2916.67 Cr. Interest Revenue 2916.67 Accruing unrecorded expenses is to accrue incurred expenses and record the related liabilities. Example: On the year-end, Dec. 31, 2004, Smith Inc.’s employees have earned total wages of $35,000 for the Monday, but Smith Inc. will not pay the wages until 5th of next month. So at the end of the accounting period, Smith need to make the following entries to accrued the wage expenses. The adjusting entry will be : Dr. Wages Expense 35000 Cr. Wages Payable 35000 Converting liabilities to revenues is to recognize as revenues the earned portion of unearned revenue liabilities. Example: On Oct. 1, 2004, Smith Inc. signed a contract for providing a special service to Cone. Smith received $50000 for the service to be provided. At the end of