Accrual Accounting and Financial Statements
gross value(original value)-less contra-asset account=net value(book value)
payroll=wages
Multiple-Step Income Statements
sales
COGS
GM(GP)
operating expense
operating income
Other(non-operating) revenue\ expenses
Income before tax
income tax
Net income
ROE the most comprehensive index
A. 4 types of adjusting entries
Explicit transactions: day-to-day+source document
Implicit transactions: no documents/visible evidences+adjustments
Accrue means to accumulate a receivable (asset) or payable (liability) during a given period even though no explicit transaction occurs
Adjusting entries are required at the end of each accounting period for accrual-basis accounting, prior to preparing the financial statements.
Aim:To bring balance sheet accounts current. To reflect proper amounts of revenues and expenses on the Income Statement.
1.Deferred (Prepaid) Expense 预付费用 assets
Cash payment occurs before expense + Prepaid expense: prepaid rent, prepaid insurance, and Equipment
before adjustment:
asset overstated, equity overstated; expense understated
when adjusting：
Debit expenses + Credit assets
2.Deferred (Unearned) Revenues 预收收入 liabilities
Cash received in advance of providing products or services
before adjustment:
liability overstated, equity understated; revenue understated
when adjusting:
Debit liabilities + Credit revenue
3.Accrued Expenses 应记费用
Costs incurred in a period that are both unpaid and unrecorded.
Wages, interest, income tax
before adjustment:
liability understated, equity overstated; expense understated
when adjusting:
Debit Expense + Credit Liability
4. Accrued Revenues 应记收入
Revenues earned in a period that are both unrecorded and not yet received
before adjustment:
asset understated, equity understated; revenue understated
when adjusting:
Debit Asset + Credit Revenue
Each adjusting entry always involves at least one income statement account and one balance sheet account.
Adjusting entries never involve cash.
Final Steps:
Ledger->Unadjusted trial balance -> Journalize & Post adjustments
-> Adjusted trial balance -> Financial Statements