ADJUSTING THE ACCOUNTS

Accountants divide economic life of business into artificial time periods  (Time Period Assumption).

Jan – Feb – Maret – April - ... – Desember

Generally a month, a quarter, or a year.

Fiscal and Calendar Years

Monthly and quarterly time periods are called interim periods.

Most large companies must prepare both quarterly and annual financial statements.

Fiscal Year = Accounting time period that is one year in length.

Calendar Year = January 1 to December 31.

Accrual-Basis Accounting

-          Transactions recorded in the periods in which the events occur.

-          Companies recognize revenues when they perform services (rather than when they receive cash).

-          Expenses are recognized when incurred (rather than when paid).

-          Harus Mencatat ketika peristiwa sudah terjadi tanpa mengetahui fisik uang cash ada atau tidak.

Cash-Basis Accounting

-          Revenues dicatat ketika Uang diterima.

-          Expenses dicatat ketika cash is paid. 

-          Cash-basis accounting is not in accordance with International Financial Reporting Standards (IFRS).

REVENUE RECOGNITION PRINCIPLE

Recognize revenue in the accounting period in which the performance obligation is satisfied.

EXPENSE RECOGNITION PRINCIPLE

Match expenses with revenues in the period when the company makes efforts to generate those revenues.

“Let the expenses follow the revenues.”

Adjusting Entries

-          Ensure that the revenue recognition and expense recognition principles are followed.

-          Necessary because the trial balance may not contain up-to-date and complete data.

-          Required every time a company prepares financial statements.

-          Will include one income statement account and one statement of financial position account.