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© Prentice-Hall of India Private Limited, 2004. All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore
© Prentice-Hall of India Private Limited, 2004. All rights reserved.2 Measuring Business Income Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.3 Income Measurement Why measure income periodically? What is income? Net profit as income Revenues Gains Expenses Losses Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.4 Accrual Accounting Accrual basis and cash basis of accounting Why is accrual a better measure of performance? Accrual: Expected, not necessarily actual, cash receipts and payments Realisation principle: Revenue recognition Matching principle: Comparing accomplishment with effort Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.5 The Adjustment Process What are adjusting entries? Why are adjusting entries needed? Deferral Delaying the recognition of an expenditure (an expense already paid) or of a revenue already received. Accrual Recognising an expense that has not been paid or of a revenue that has not been received. Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.6 Deferral Apportioning recorded expenses Prepaid expenses Office supplies Depreciation Apportioning unearned revenues Advance collection of rents, air tickets, magazine subscriptions, insurance premium, etc. Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.7 Accrual Recording accrued expenses Expenses payable for services already used e.g., unpaid salaries, interest, and income tax Recording accrued revenues Revenue not received for services already provided e.g., professional fee revenue receivable, interest revenue receivable Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.8 Preparing Financial Statements from the Adjusted Trial Balance Adjusted trial balance Adjustments columns Extending balances to the adjusted trial balance columns Preparing financial statements Profit and loss account from the revenue and expense amounts Balance sheet from the asset, liability and equity amounts Chapter 3
© Prentice-Hall of India Private Limited, 2004. All rights reserved.9 Steps in the Accounting Cycle 1.Analyse transactions 2.Record transactions in the journal 3.Post journal entries to the ledger accounts 4.Prepare a trial balance 5.Journalise and post adjusting entries and prepare adjusted trial balance 6.Prepare financial statements 7.Journalise and post closing entries: temporary accounts 8.Carry forward the balance sheet accounts to the next accounting period: permanent accounts Chapter 3
© PHI Learning, All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute.
© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy.
Review of the Accounting Process INTERMEDIATE ACCOUNTING I CHAPTER 2 This presentation is under development.
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Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this... Measurement:
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Chapter 3 Completing the Accounting Cycle. Chapter 3Mugan-Akman Accounting Cycle Analyze and record the transactions Post the transactions.
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Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without.
The Accounting Cycle Transactions 1. Journalization 6. Financial Statements 7. Closing entries 8. Post-closing trail balance 9. Reversing entries 3. Trial.
HFT 2403 Chapter 3 Accounting Adjustments. The Need for Adjustments The life of an enterprise is divided into equal segments of time The life of an enterprise.
ADJUSTED TRIAL BALANCE An Adjusted Trial Balance is prepared after all adjusting entries have been journalized and posted. It shows the balances of all.
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Measuring Business Income 3. Profitability Measurement: Issues and Ethics OBJECTIVE 1: Define net income, and explain the assumptions underlying income.
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©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren Accrual Accounting and the Financial Statements Chapter 3.
5 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater The Accounting Cycle Completed: Adjusting, Closing,
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Week 6. Need to update certain general ledger accounts at the end of the fiscal period. Reflect “internal” transactions ◦ Supplies used ◦ Prepaid.
Adjustments to the Accounts Most transactions are recorded when they occur. Some transactions might not even seem like transactions and are recognized.
Chapter 3 Accrual Accounting Concepts. Why is Accrual Accounting Needed? Cash received or paid Revenue earned Expense incurred.
3-1 CHAPTER3 Adjusting the Accounts. 3-2 Generally a month, a quarter, or a year. Also known as the “Periodicity Assumption” Timing Issues Accountants.
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The Adjusting Process Chapter 3 3-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall.
1 Copyright © 2013 McGraw-Hill Ryerson Limited LO4 Differentiate between the different types of adjusting journal entries and understand their purposes.
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