Page 132 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

1998 3,526 273
1999 4,430 343
2000 5,377 416
2001 6,295 488
Examining the trend percentages, we can see that ShopaLot's s net income has increased steadily over the 10-
year period. The 2010 net income is over 4 times as much as the 2001 amount. This is the kind of performance that

management and stockholders seek, but do not always get.
In the first three chapters of this text, you have learned most of the steps of the accounting process. Chapter 4
shows the final steps in the accounting cycle.

An accounting perspective:

Uses of technology

The Internet sites of the Big-4 accounting firms are as follows:
Ernst & Young http://www.ey.com
Deloitte Touche Tohmatsu http://www.deloitte.com
KPMG http://www.kpmg.com
PricewaterhouseCoopers http://www.pwcglobal.com
You might want to visit these sites to learn more about a possible career in accounting.

Understanding the learning objectives
• The cash basis of accounting recognizes revenues when cash is received and recognizes expenses when cash
is paid out.

• The accrual basis of accounting recognizes revenues when sales are made or services are performed,
regardless of when cash is received; expenses are recognized as incurred, whether or not cash has been paid
out.
• The accrual basis is more generally accepted than the cash basis because it provides a better matching of
revenues and expenses.
• Adjusting entries convert the amounts that are actually in the accounts to the amounts that should be in the

accounts for proper periodic financial reporting.
• Adjusting entries reflect unrecorded economic activity that has taken place but has not yet been recorded.
• Deferred items consist of adjusting entries involving data previously recorded in accounts. Adjusting entries
in this class normally involve moving data from asset and liability accounts to expense and revenue accounts.
The two types of adjustments within this deferred items class are asset/expense adjustments and
liability/revenue adjustments.
• Accrued items consist of adjusting entries relating to activity on which no data have been previously recorded
in the accounts. These entries involve the initial recording of assets and liabilities and the related revenues
and expenses. The two types of adjustments within this accrued items class are asset/revenue adjustments

and liability/expense adjustments.
• This chapter illustrates entries for deferred items and accrued items.
• Failure to prepare adjusting entries causes net income and the balance sheet to be in error.

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