Purpose and status of the framework
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- Deferred or Unearned Revenue
- Preparing the financial statements
- Preparing the closing entries
- Preparing reversing entries
- Accrued income Accrued expense Prepaid expense, only if the expense method
- Accrued Income Prepaid expense (Exp. Method)
- ASSET METHOD
2. Accruals – Income or expense recognition precedes the cash flow. a. Accrued Income – Income earned but not yet received. A receivable is always debited and income is recognized (credited) b. Accrued expenses – Expenses incurred but not yet paid. An expense is recognized (debited) and a liability is always credited. 3. Estimates – Adjusting entries that do not involve cash flows. a. Doubtful accounts – The expense to be matched against credit sales. b. Depreciation - Allocation of the cost of fixed assets as expense over its useful life 4. Ending inventory - An adjustment to set up the year-end physical count of the inventory. This only applies if the PERIODIC INVENTORY SYSTEM IS USED. Preparing the financial statements – The most important part of the summarizing phase, this is where the processed information is communicated to external users. Basic financial statements a. Statement of financial position b. Income statement or a statement of comprehensive income c. Statement of changes in equity e. Notes and disclosures Preparing the closing entries – Recorded and posted for the purpose of closing all nominal or temporary accounts to the income summary account and the resulting net income or loss is afterwards closed to the capital or retained earnings account. Preparing the post closing trial balance – A listing of general ledger accounts and their balances after closing entries have been made. The post closing trial balance is the same with the year-end statement of financial position, the only difference is that valuation accounts like allowances for assets are found in the credit side instead of being deducted from the related asset account. Preparing reversing entries – The last and optional step in the accounting cycle. Reversing entries are made at the beginning of the new accounting period to reverse certain adjusting entries from the succeeding accounting period. The purpose of reversing entries is a matter of convenience for accruals and consistency for the adjustments in the following year for prepaid expenses and deferred income when the income statement method was used to record the cash flow. Once again, reversing entries will only apply to the following but remember that they are not necessary and only optional: Accrued income Accrued expense Prepaid expense, only if the expense method was used in recording the payment Unearned income, only if the income method was used in recording the collection
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