ACCT 2000 Chapter 4 class notes - Accounting 2000 Chapter 4...

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Accounting 2000Chapter 4 Notes-Revenue recognition principle is the generally accepted accounting principle that dictates that revenue be recognized in the accounting period it is earned.- Revenues recognized only when a customer pays = cash basis- Accrual basis accounting: in accord with generally accepted accounting principles, recognize revenue in the period it is earned, record events that change company’s financial statement in period it occurred.- The use of the cash basis of accounting violates both revenue and expense recognition principles.- Supplies, rent, insurance= prepaid expense- Book value is difference between an assets cost and its accumulated depreciation- Accrued expense: wages, taxes, interest- Adjustments for accrued revenues increase liabilities and increase revenues- Salary is liability- Failure to accrue salaries expense results in understating expenses and overstating liabilities- Principle*Rate*Time- adjusted trial balance can directly prepare financial statements- net change in retained earnings= revenues- (expenses+ dividends)- contra revenue accounts are permanents- service revenue will have a zero balance after closingnet income or net lose is transferred to retained earnings= closing process- final step in accounting process is a post closing trial balance-journalize and post transactions, journalize and post adjusting entries, journalize and post closing entries= order of accounting cycle.- retained earnings, total assets, net income= accrual accounting- temporary accounts are RED1.Explain the revenue recognition principle and the expense recognition principle.2.Differentiate between the cash basis and the accrual basis of accounting.3.Identify the major types of adjusting entries.4.Prepare adjusting entries for deferrals.5.Prepare adjusting entries for accruals.6.Describe the nature and purpose of the adjusted trial balance.7.Explain the purpose of closing entries.8.Describe the required steps in the accounting cycle.Timing Issues:The Periodicity Assumption requires accountants to divide the economic life of a business into artificial time periods.*Prepare financial statements at the end of the period|-----Jan------Feb-------------------------Year 1----------------------------Year 2-------|Companies recognize revenue in the accounting period in which it is earned. This is called the Revenue Recognition Principle.Page 1of 11
Accounting 2000Chapter 4 Notes*Earned when goods or services are providedExpenses are matched with revenues in the period when efforts are expended to generate revenues. This is called the Expense Recognition Principle.

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