State two generally accepted accounting principles that relate to adjusting the accounts.
3. Rick Marsh, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in May. If Marsh's law firm prepares monthly financial statements, when should it recognize revenue from this engagement? Why?
4. Why do accrual-basis financial statements provide more useful information than cash-basis statements?
8. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category
Answer is attached.
2. State two generally accepted accounting principles that
relate to adjusting the accounts.
GAAP with respect to adjusting the accounts: GAAP stresses that the books of accounts should be prepared on the basis of accrual basis of accounting and not on the cash basis of accounting. If the accounts are prepared on the basis of cash basis of accounting, the accounts should be adjusted for accruals and deferrals.
GAAP with respect to events after the balance sheet date:
Events after the balance sheet date include all events up to the date that the accounts are authorised for issue even when these events occur after the publication of profit or other figures.
Non adjusting events are those events that are indicative of conditions that arose after the balance sheet date.
Adjusting events are those events that provide evidence of conditions that existed at the balance sheet date
Examples of adjusting events are:
1. the discovery of errors and frauds.
2. the settlement of a case in the court that was ongoing on the balance sheet date
3. the sale of inventory at a loss after the year end
4. The insolvency of a customer
In the above cases, financial statements should be adjusted to show the impact of the above information.
Non adjusting events
In case of Non adjusting events, the financial statements should not be adjusted to include the above information. However, the non-adjusting events should be disclosed in the financial statements. Examples of non adjusting entries are:
1. Decline in the market value of the securities
2. Commencement of new litigation
3. If there is any major sale or purchase of asset
4. If any operation of the company is discontinued.
5. If the company is planning to go for restructuring.
GAAP with respect to adjusting the accounts
3.Rick Marsh, a lawyer, accepts a legal engagement in March,
performs the work in April, and is paid in May. If Marsh's
law firm prepares monthly financial statements, when
should it recognize revenue from this engagement? Why?
The revenue should be recognized in the month of April because
In April the services are rendered.
4. Meaning of Accrual basis of accounting:
In accrual basis of accounting, the income is reported as soon as it is earned and expenses will be reported as soon as it is incurred. In accrual basis, the company has the discretion of when the income and expense can be recognized. Revenue is recognized when the revenue is earned and the revenue is realized or realizable. Likewise, expense is recognized when the related revenue is recognized.
Cash basis of accounting:
In cash basis of accounting, the income is reported when the cash is actually received and the expenses will be reported when it is actually paid.
Why do accrual-basis financial statements provide more
useful information than cash-basis ...
The solution contains answers for five questions ; 1. GAAP with respect to adjusting of accounts 2. accrual vs cash basis of accounting and advantages of accrual method over cash basis of accounting 3. two types of adjusting entries 4. exercise on adjusting entries 5.one more exercise on making adjusting entries.