Chapter 8!
The Accounting Cycle
Unit 3 Test (cover chapter 6, 7 and 8, but
we will cover only some portion of chapter
8) will be Tuesday Nov 17
Financial Statement must be….



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Relevant: Readers want to see a current
picture value of a business’ important
features. (= Nobody likes old or outdated
information)
Reliable: Readers want the information to
be based on solid evidence.
Comparable: Readers want to compare
from one year to the next and one
company to another company.
Meeting the objectives of relevancy,
reliability and comparability requires the
input of senior accounting professionals.
Accrual Accounting vs Cash basis Accounting
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Accrual Accounting means recording
revenues and expenses when they happen,
regardless of whether cash is received or
paid. (honors GAAP and IFRS)
Cash basis Accounting means recording
transactions only when cash is received or
paid. (violates GAAP and IFRS)
In reality, nobody uses cash basis
accounting any more. People used to use
cash basis accounting long time ago.
Financial Statement Comparability
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The Time Period Concept ensures that the
Comparability objective in accounting is
met. This means that reporting period must
be consistent such as one year, one month
or one quarter
Some revenues and expenses occur
continuously, and accrural accounting
require accounting clerks to record them as
they happen. (even if the cash was not
exchanged)
Adjusting Entry
Accounting clerks make entries only
when there is source document.
 This is why senior accountants must
step in at the end of a fiscal period to
deal with the revenue and expenses
which have been accruing but have
not yet been recorded.

Adjusting Entry

There are many different types of adjusting
entries accountants make at the end of the
fiscal period:
Prepaid Expense
Prepaid Insurance
Supplies adjustment
Unearned Revenue
Late-Arriving Purchase Invoice
Adjusting Entry for Unearned Revenue
Sometimes customer pays for service
before the end of the fiscal period. Then
the business owes service or goods to the
customer on the last day. Then the business
provides the service (or goods) next year.
 Then Revenue Recognition says that
accountant must make an adjusting entry,
which defers the recording of revenue to
next fiscal period. (because revenue is not
earned yet.)

Adjusting Entry for Unearned Revenue
For example, a customer (Mathew) paid $600 on
August 1, which covers 1 year membership. (=
$50 per month) Goodlife is a public corporation,
so their fiscal period ends on September 30.
 On August 1st, the bookkeeper would make the
following journal entry:
Dr.
Cr.
Aug 1 Bank
600
Fees earned (Rev)
600
Received annual membership fee

Adjusting Entry for Unearned Revenue
On September 30, the accountant would
make the following adjusting entry:
Dr.
Cr.
Sep 30 Fees earned 600
Prepaid fee(liab) 600
Adjusting Entry for annual membership fee

Note: Prepaid fee = Unearned revenue account
Adjusting Entry for Unearned Revenue
Since we used up two months of the
membership fee revenue : 2 * $50 per
month is 100$
 On September 30, the accountant would
also make the following journal entry:
Dr.
Cr.
Sep 30 Prepaid fee
100
Fees earned
100
Adjusting Entry: Recognizing two months of
revenue

T account for Unearned Revenue
Classwork
Review Questions – pg 275 #3, 4
Page 278 #5 (a, b and d)
Page 278 #6