Chapter 3
Accounting period Annual Financial statement Less than a year interim financial statement Fiscal year (not starting at Jan 1 ending at Dec 31)
Basis of Accounting Accrual Basis of Accounting Cash Basis Accounting
Adjusting Accounting
Necessary for transactions and events that extend over more than one period Adjustment Paid (or received) cash before expense (or received) recognized. Prepaid (deferred) expenses
Prepaid items are assets until they become used then they become expenses Unearned (deferred) revenue
Unearned (deferred) revenue are liabilities until they become earned then they become revenues.

Paid (or received) cash after expense (or received) recognized. Accrued expenses Accrued expenses must be reported on the income statement for the period in which incurred (not paid) Accrued expenses involve increasing EXPENSES and increasing LIABILIES This recognizes expenses incurred in a period but not yet paid

Accrued revenue
1. Revenues earned in a period that are both UNRECORDED and not yet RECEIVED in cash (or other assets)
2. Accrued revenues must be reported on the income statement for the period in which incurred (not received)
3. Accrued revenues involve increasing REVENUES and increasing ASSETS
4. This recognizes revenues incurred in a period but not yet received
Adjusted trial balance 1. Unadjusted trial balance is a list of accounts and balances prepared before adjustments are record.
2. Adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger.
Preparing financial statement
Step 1. Prepare income statement Step 2.prepare statement of owner’s equity Step 3.prepare balance sheet
Profit margin: the percent of profit in each dollar of sales Profit Margin=Net Income/Net