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CHAPTER F3: MEASURING REVENUES AND EXPENSES I. Accrual Accounting A. Accrual Accounting is a form of accounting in which revenues are recognized when they are earned and expenses recognized when they are incurred. 1. In many cases, a company earns revenues or incurs expenses in a fiscal period other than the one in which cash is received or paid. 2. To recognize revenues and expenses means to record them as accounting transactions. B. Accrual accounting focuses on business activities to determine when to record revenues and expenses. II. Revenue Transactions A. Accounts Receivable is an asset account that increases when goods are sold on credit. 1. Accounts receivable represents an amount a customer owes to a company. 2. Revenue is not recognized when the cash is received because it is recognized when the goods are actually sold. 3. Accounts receivable links the transactions recording the sale and collecting the cash. 4. Exhibit 1 is an example of linking revenue and cash through accounts receivable. B. Unearned Revenue is a liability account that results when a company receives cash from a customer for goods or services to be provided in the future. 1. The liability results from the obligation of a company to order or make the goods and provide them to the customer. 2. Once the goods are transferred to the customer or the service has been provided, the obligation is fulfilled, the liability eliminated, and revenue is recognized. 3. Exhibit 2 illustrates linking cash and revenue through unearned revenues. C.
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This note was uploaded on 05/12/2008 for the course ACCT 2101 taught by Professor Woods during the Spring '08 term at Middle Georgia State College.

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