3achapter4

3achapter4 - Tools for Business Decision Making, 4th Ed....

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1 4-1 Financial Accounting: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso CHAPTER 4 4-2 Chapter 4 Accrual Accounting Concepts ± Explain the revenue recognition principle and the matching principle. ± Differentiate between the cash basis and the accrual basis of accounting. ± Explain why adjusting entries are needed and identify the major types of adjusting entries. ± Prepare adjusting entries for prepayments. 4-3 Chapter 4 Accrual Accounting Concepts ± Prepare adjusting entries for accruals. ± Describe the nature and purpose of the adjusted trial balance. ± Explain the purpose of closing entries. ± Describe the required steps in the accounting cycle. 4-4 Time Period Assumption. .. Divides the economic life of a business into artificial time periods WHY? to provide immediate feedback on how the business is doing. 11 1
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2 4-5 Time Period Assumption. .. Generally a month, a quarter, or a year. An accounting time period that starts on January 1 and ends December 31 is called a calendar year. An accounting time period that is one year long is called a fiscal year. 4-6 Revenue Recognition Principle. .. ± Dictates that revenue be recognized in the accounting period in which it is earned. ± Is considered earned ± when the service has been provided or ± when the goods are delivered. 4-7 NOT THAT FUNNY 4-8 Matching Principle. .. Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded.
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3 4-9 Review a. Cost Principle. b.Matching Principle c. Periodicity Principle d.Revenue Recognition Principle Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? 4-10 Review a. Cost Principle. b.Matching Principle c. Periodicity Principle d.Revenue Recognition Principle Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? 4-11 When would revenue be recorded for the following scenario . . . Ad agency is hired for a project in May, does the work in June and is paid in July? June Review 4-12 Review When would expenses be recorded for this companion scenario ? The Ad agency on this project incurs $1,500 of expenses in May, $3,000 in June, and none in July? The answer is June! Matching says the expenses should follow the revenue.
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4 4-13 Review When would revenue be recorded for the following scenario . . . Sell plane ticket on September 1 for a flight on October 15? The answer is October – when the service is provided! 4-14 Review When would expenses be recorded for the following scenario . . . The airline pays pilot salaries on October 7 th for the week ended September 30th? The answer is September – the pilots provided labor services for September flights during that month. 4-15 NEW CONCEPT CURRENT: Cash Accounts receivable Accrued revenue Inventory Prepaid expenses LONG TERM: Fixed assets Allowance for doubtful accounts Accumulated depreciation TERMINOLOGY ± RECOGNIZED: Recorded to the ledger. . i.e incorporated into the financial statements ± REALIZED: Physical receipt/ giving. Not necessarily
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This note was uploaded on 08/06/2008 for the course ECON 3A taught by Professor Loster during the Summer '07 term at UCSB.

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3achapter4 - Tools for Business Decision Making, 4th Ed....

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