Chapter 4 Notes - Compiled by Amber Cole Accounting: Tools...

Compiled by Amber Cole Accounting: Tools for Business Decision Making ,
by Kimmel, Weygandt & Kieso, 6th ed
Chapter 4: Accrual Accounting Concepts
Where we’ve been:
In Chapter 3, we began learning about the accounting cycle . The accounting cycle is the process that we
go through to prepare financial statements. Specifically, we learned the first four steps of the accounting
cycle, namely:
1. Identify events that need to be recorded (accounting transactions)
2. Journalize these transactions in the general journal
3. Post them to the ledger
4. Prepare a trial balance
Where we’re going:
In Chapter 4, we will learn the last five steps of the accounting cycle, namely:
5. Journalize and post adjusting entries
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
ACCRUAL ACCOUNTING CONCEPTS
As you should recall from Chapter 2, the periodicity assumption allows us to divide the economic life of
a business into artificial time periods . The accounting cycle referenced above is performed every
period. The most common periods used are a month , quarter , and year. Once a company decides what
period will be used, they have to decide which revenues and expenses should be recorded in that
period. The basis of accounting that a company chooses determines when revenues and expenses are
recorded.
Accrual vs. Cash Basis Accounting
Two bases of accounting are commonly used in practice:
1. Cash-basis accounting
a. Revenues are recognized only when _____________________________ (no matter
when earned).
b. Expenses are recognized only when _____________________________ (no matter
when incurred).
c. ___________________under generally accepted accounting principles (GAAP)
1.Therefore, only those companies that are not required to follow GAAP are
allowed to use cash-basis accounting.
1

Compiled by Amber Cole Accounting: Tools for Business Decision Making ,
by Kimmel, Weygandt & Kieso, 6th ed
2. Accrual-basis accounting ( our focus! )
a. Transactions are recorded in the period in which the event occurs .
b. Two principles of accrual accounting:
1. The Revenue Recognition Principle
a. Revenues are recognized when _______________, even if cash is not
received .
b. For service companies, revenue is considered earned when the service
is performed .
Example:
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:
June Accounts Receivable XXX
Service Revenue XXX
July Cash XXX
Accounts Receivable XXX
Work in class: Exercise 1
2.Expense Recognition Principle (a.k.a. Matching Principle)
a. Expenses are recognized when _________________, even if cash was
not paid.
b. Expenses are “matched” with revenues in the period the efforts are
expended to generate the revenues. The period that the expense is
recorded should be the same period in which the associated revenue is
earned and recorded.