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© PHI Learning, 2008. All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore
© PHI Learning, 2008. All rights reserved.2 Measuring Income Chapter 3
© PHI Learning, 2008. All rights reserved.3 Income Measurement Why measure income periodically? What is income? Net profit as income Revenues Gains Expenses Losses Chapter 3
© PHI Learning, 2008. 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 Realization principle: Revenue recognition Matching principle: Comparing accomplishment with effort Chapter 3
© PHI Learning, 2008. All rights reserved.5 The Adjustment Process What are adjusting entries? Why are adjusting entries needed? Deferral Delaying the recognition of an expense already paid or of a revenue already received. Accrual Recognizing an expense that has not been paid or of a revenue that has not been received. Chapter 3
© PHI Learning, 2008. 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
© PHI Learning, 2008. 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
© PHI Learning, 2008. 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
© PHI Learning, 2008. 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
© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy.
© PHI Learning, All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute.
Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this... Measurement:
Financial Accounting Chapter 4. Adjustments, Financial Statements, and the Quality of Earnings.
Review of the Accounting Process INTERMEDIATE ACCOUNTING I CHAPTER 2 This presentation is under development.
CHAPTER THREE FINANCIAL REPORTING PROCESS. PRINCIPLE – Revenue Recognition Revenue is recognized when it is earned not paid Expenses are recognized when.
Income Measurement and Accrual Accounting
Chapter 6 Accrual Accounting Concepts and the Accounting Cycle.
Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
1 Chapter 3 Measuring Business Income Financial & Managerial Acct (Needles/Powers/Crosson) Slide show (Financial Accounting 4e by Porter and Norton)
7/e PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning 4 Income Measurement and Accrual Accounting.
Chapter 4 Income Measurement and Accrual Accounting Financial Accounting: The Impact on Decision Makers 6/e by Gary A. Porter and Curtis L. Norton Copyright.
1 Chapter 4 Income Measurement and Accrual Accounting Financial Accounting 4e by Porter and Norton.
Adjusting Accounts & Preparing Financial Statements
Chapter 3 Completing the Accounting Cycle. Chapter 3Mugan-Akman Accounting Cycle Analyze and record the transactions Post the transactions.
Chapter 4 Income Measurement and Accrual Accounting
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