Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

Balance day adjustments are therefore required to ensure the financial statements portray a correct picture on the firm’s financial performance and financial position. We have to recognize all transaction occurring in that accounting period, irrespective of whether cash has been received or paid. The ultimate objective of adjusting entries is to ensure that the revenues (income) earned in the accounting period are matched by all costs incurred for that same accounting period (Monish

College, 201 1). Prepayment There are two types of adjusting entries, prepayments and accruals. Prepayment is a payment in advance of the period to which it pertains. What this mean is, this category of adjustments aligns recorded revenues (income) and costs with appropriate accounting periods. For example, there are situations where cash is received before goods and services are provided to customers or situations where cash has been paid in advance for costs of operation and which relate to future accounting periods.

Prepayments divided into two sections, which are prepaid expenses and unearned revenue. Prepaid expenses is type of assets that shown on a balance sheet as a result of business payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is receive something of value in the near future. Prepayments often occur in regard to insurance, supplies advertising, and rent. Unearned revenue is also known as prepaid revenue.

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