Ch04%20-%20Accrual%20accounting%20concepts

Ch04%20-%20Accrual%20accounting%20concepts - Chapter 4...

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Chapter 4 Accrual Accounting Concepts and the Accounting Cycle
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Today o We will be learning about non-cash transactions (accruals, deferrals, etc.) o Revenue recognition o Matching revenues with expenses
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Revenue Recognition Principle Requires that revenues be recorded in the time period when the work is performed. First condition: The Earnings process is complete. There is not much work left to do. Second condition: The related cash flow is reasonably certain Example: Warranty revenue
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Matching Principle Requires that expenses be recorded in the same time period as the revenues they helped generate.
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Here’s an example of adhering to the matching principle…. . The unadjusted balance in the supplies account may not be accurate. Just because we purchased $500 of supplies……
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Doesn’t mean we still have them. 500 0 0 0 0 Supplies Unless we used none of the supplies the balance in Supplies is   TOO HIGH!
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What Happened? The Journal Entry Process (at the time of Purchase) Was not simultaneous with the Economic Activity (Usage of the supplies) It would also be silly to prepare a journal entry every time we used the stapler?!
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In order for the financial statements to be correct…. The Economic Activity needs to be recorded in the time period when we actually used the supplies Example of the Matching Principle 500 350 350 150 0 350 0 Supplies Supplies Expense Assets = Liabilities + Shareholders Equity Supplies Supplies Expense -350 -350
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It’s all about Timing! Timing of the journal entry Versus Timing of the economic activity
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Sometimes the cash flow precedes the economic activity (Deferrals) Insurance Premium paid Use Supplies Purchase Supplies Policy Term Customer Pays In Advance We Perform Services Purchase Equipment We Use Equipment Cash Flow has already been recorded The Economic Activity has not yet been recorded.
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Sometimes the economic activity precedes the Cash Flow (Accruals) Employees are paid. Employees Work We Perform Services We Bill The Customer Journal Entry for Cash flow will be recorded next period The Economic Activity has been recorded.
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The purpose of every adjusting entry: Is to ensure that all Assets and Liabilities and the resulting Revenues and Expenses Are Properly Valued Prior to the Preparation of Financial Statements.
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Time Balance Sheet Date
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This note was uploaded on 02/17/2009 for the course AIM 2301 taught by Professor Muslu during the Spring '08 term at University of Texas at Dallas, Richardson.

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Ch04%20-%20Accrual%20accounting%20concepts - Chapter 4...

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