4-21.Explain the revenue recognition principle and the expense recognition principle.2.Differentiate between the cash basis and the accrual basis of accounting.3.Explain why adjusting entries are needed, and 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.Study ObjectivesStudy Objectives
4-3Generally a month, a quarter, or a year.Fiscal year vs. calendar yearAccountants divide the economic life of a business into artificial time periods (Periodicity Assumption).SO 1 Explain the revenue recognition principle and the expense recognition principle.Jan.Feb.Mar.Apr.Dec.. . . . .Timing IssuesTiming Issues
4-4Timing IssuesTiming IssuesThe Revenue Recognition PrincipleCompanies recognize revenue in the accounting period in which it is earnedIn a service enterprise, revenue is considered to be earned at the time the service is performed.SO 1 Explain the revenue recognition principle and the expense recognition principle..
4-5Timing IssuesTiming IssuesIllustration:Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be:SO 1 Explain the revenue recognition principle and the expense recognition principle.
4-6Timing IssuesTiming Issues“Let the expenses follow the revenues.”SO 1 Explain the revenue recognition principle and the expense recognition principle.Illustration 4-1 (Partial)
4-7Accrual-Basis Accounting►Transactions recorded in the periods in which the events occur.►Revenuesare recognized when earned, even if cash was not received. ►Expensesare recognized when incurred, even if cash was not paid.Timing IssuesTiming IssuesAccrual versus Cash Basis of AccountingSO 2 Differentiate between the cash basis and the accrual basis of accounting.
4-8Cash-Basis Accounting►Revenues are recognized only when cash is received.►Expenses are recognized only when cash is paid. ►Prohibited under generally accepted accounting principles (GAAP).Timing IssuesTiming IssuesSO 2 Differentiate between the cash basis and the accrual basis of accounting.Accrual versus Cash Basis of Accounting