ACC1701: Accounting for Decision Makers - 4) The Accounting Cycle: Adjusting Accounts & Completing the Cycle

4-1: Adjusting Entries 

Adjusting journal entries to make sure that P/L shows accurate periodical expense and revenue based on accrual accounting.

Expense adjusting: 

• Prepaid Expenses

Revenue adjusting: 

• Unearned revenue 

Other adjusting: 

• Depreciation Expense(減価償却) - the reduction in the value of a non-current asset due to the passage of time (wear and tear of the asset)

Equation to calculate depreciation expense 

• Interest Expense for current accounting year

• Unpaid Salary Expense 

• Allowance for Doubtful Debts

4-2: Periodic Reporting and Accrual Accounting 

Periodic Reporting

• Calendar Year: Jan 1 to Dec 31

• Fiscal Year: 12 consecutive months ending any date

• For Timeliness - the report provides timely information

• The accounting system prepares reports at regular intervals to show fair and comparable information to external stakeholders

Accrual Accounting

• Recognizes events when the main economic impact is made for sake of informing accurate profit to external stakeholders 

• Accrual record revenues and expenses as they are earned and incurred, regardless of when cash is received/ paid

• Cash-Basis has a 'time-period problem'

4-3: Revenue Recognition Principle (収益認識基準)

The 4 criteria of revenue recognition 

1. Goods have been delivered, or services performed

2. The seller's price to the buyer is fixed or determinable

3. Persuasive evidence of a payment arrangement exists

4. Payment is realized or realizable (ie collectability is reasonably assured)

The recognition principle does not care whether or not cash is received

4-4: Matching Principle（収益費用対応の原則） 

The 4 criteria of expense recognition

1. Expenses should be matched with the revenues they generate

2. If they cannot be matched, then they are recognized in the period they occur

3. Expenses are recognized in the period over which they generate economic benefits, regardless of when cash is paid