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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.
Chapter 4 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.
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 Using Financial Accounting Information: The Alternative to Debits and Credits, 6/e by Gary A. Porter.
Chapter 4, Slide #1 Types of Adjusting Entries ALL RECOGNIZE REVENUE OR EXPENSES BEFORE OR AFTER CASH IS EXCHANGED Deferred expense Accrued liability Accrued.
ACTG 3110 Chapter 3 – The Accounting Information System.
Unit 1.3 Adjusting the Accounts The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial.
Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without.
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.
Principles of Financial Accounting Chapter 4 More GAAP Revenue Recognition Principle Accrual basis – report revenues when they are earned. Cash basis.
BRIEF OF CHAPTER 1, 2, 3, 4 Sania Wadud. Basic Accounting Rule Basic Equation: Assets = Liabilities + Owner’s Equity Expanded Equation: Assets= Liabilities.
The Adjusting Process ACG 2021 Chapter 3. Accounting period concept: Cash basis –Revenues and expenses are reporting the income statement in the period.
Chapter 4-1 A multiple-column form used in preparing financial statements. Not a permanent accounting record. Five step process. Use of worksheet is optional.
The Accounting Cycle Transactions 1. Journalization 6. Financial Statements 7. Closing entries 8. Post-closing trail balance 9. Reversing entries 3. Trial.
ACCT 100 Chapter 3 Adjusting the Accounts Accrual Accounting and the Financial Statements 2 Objectives of the Chapter I.Introduce the accrual accounting.
Financial Accounting Fundamentals John J. Wild Third Edition John J. Wild Third Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies,
4 - 1 The Accounting Cycle Continued – Preparing Worksheets and Financial Statements Chapter 4.
4-1 ACCRUAL ACCOUNTING CONCEPTS Financial Accounting, Sixth Edition 4.
Measuring Business Income 3. Profitability Measurement: Issues and Ethics OBJECTIVE 1: Define net income, and explain the assumptions underlying income.
1 Copyright © 2013 McGraw-Hill Ryerson Limited LO4 Differentiate between the different types of adjusting journal entries and understand their purposes.
Chapter 3 Accrual Accounting Concepts. Why is Accrual Accounting Needed? Cash received or paid Revenue earned Expense incurred.
Adjustments to the Accounts Most transactions are recorded when they occur. Some transactions might not even seem like transactions and are recognized.
Copyright © 2015 McGraw-Hill Education. All rights reserved. Chapter 2 Review of the Accounting Process.
ADJUSTED TRIAL BALANCE An Adjusted Trial Balance is prepared after all adjusting entries have been journalized and posted. It shows the balances of all.
© 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.
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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Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013.
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1 Accrual Accounting and the Financial Statements Chapter 3.
Slide 3-1. Slide 3-2 Chapter 3 Adjusting the Accounts Financial Accounting, IFRS Edition Weygandt Kimmel Kieso.
STUDY OBJECTIVES After studying this chapter, you should understand: Time period assumptionAdjusting entries for prepayments Accrual basis of accountingAdjusting.
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