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Chapter 2 Accounting for Accruals

Chapter 2 Accounting for Accruals - CHAPTER two ACCOUNTING...

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CHAPTER two : ACCOUNTING FOR ACCRUALS Accrual Accounting Asset Source Transaction – increases the company’s assets and its equity but does not affect the income statement Accrual accounting requires companies to recognize revenue in the period in which the work is done regardless of when cash is collected. Accounts Receivable – the balance represents the amount of cash that is expected to be collected in the future and has no immediate effect on the cash flow until the cash is actually collected Collection of an account receivable is an asset exchange transaction. Asset Exchange Transaction – one asset account increases and another asset account decreases but the amount of total assets is unchanged Salaries Payable – balance represents the amount of cash that the company is obligated to pay the employee in the future Claims Exchange Transaction – the claims of creditors (liabilities) increase and the claims of stockholders (retained earnings) decrease Asset Use Transactions – cash payments to the creditors 2004 Financial Statements Income Statement o Illustrates several effects of accrual accounting. o Expenses can be defined as decreases in assets or increases in liabilities resulting from consuming assets and services to generate revenue. Statement of Changes in Stockholders’ Equity o Reports the effects on equity of issuing common stock, earning net income, and paying dividends to stockholders.
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