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

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Compiled by Amber ColeAccounting: Tools for Business Decision Making,by Kimmel, Weygandt & Kieso, 6th edChapter 4: Accrual Accounting ConceptsWhere we’ve been:In Chapter 3, we began learning about theaccounting cycle.The accounting cycle is the process that wego through to prepare financial statements.Specifically, we learned the first four steps of the accountingcycle, namely:1.Identifyevents that need to be recorded (accounting transactions)2.Journalizethese transactions in the general journal3.Postthem to the ledger4.Prepare atrial balanceWhere we’re going:In Chapter 4, we will learn the last five steps of the accounting cycle, namely:5.Journalize and postadjusting entries6.Prepare anadjusted trial balance7.Preparefinancial statements8.Journalize and postclosing entries9.Prepare apost-closing trial balanceACCRUAL ACCOUNTING CONCEPTSAs you should recall from Chapter 2, theperiodicity assumptionallows us to divide the economic life ofa business intoartificial time periods.The accounting cycle referenced above is performed everyperiod.The most common periods used are amonth,quarter, andyear.Once a company decides whatperiod will be used, they have to decide whichrevenuesandexpensesshould be recorded in thatperiod.Thebasis of accountingthat a company chooses determines when revenues and expenses arerecorded.Accrual vs. Cash Basis AccountingTwo bases of accounting are commonly used in practice:1.Cash-basis accountinga.Revenues are recognized only when_____________________________(no matterwhen earned).b.Expenses are recognized only when_____________________________(no matterwhen incurred).c.___________________under generally accepted accounting principles (GAAP)1.Therefore, only those companies that are not required to follow GAAP areallowed to use cash-basis accounting.1
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Compiled by Amber ColeAccounting: Tools for Business Decision Making,by Kimmel, Weygandt & Kieso, 6th ed2.Accrual-basis accounting (our focus!)a.Transactions are recorded in the period in which the eventoccurs.b.Two principles of accrual accounting:1.The Revenue Recognition Principlea.Revenues are recognized when_______________, even if cash is notreceived.b.For service companies, revenue is considered earned when theserviceis performed.Example:Assume Conrad Dry Cleaners cleans clothing on June 30, butcustomers do not claim and pay for their clothes until the firstweek of July.The journal entries for June and July would be:JuneAccounts ReceivableXXXService RevenueXXXJulyCashXXXAccounts ReceivableXXXWork in class:Exercise 12.Expense Recognition Principle (a.k.a. Matching Principle)a.Expenses are recognized when_________________, even if cash wasnot paid.b.Expenses are “matched” with revenues in the period the efforts areexpended to generate the revenues.The period that the expense isrecorded should be the same period in which the associated revenue isearned and recorded.

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Term
Fall
Professor
AmberCole
Tags
Financial Accounting, Balance Sheet, Decision Making, Chapter 4, Generally Accepted Accounting Principles, Amber Cole
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College Accounting, Chapters 1-27
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Chapter 4 / Exercise E 4-1A
College Accounting, Chapters 1-27
Heintz/Parry
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