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chapter4notes - Ch. 4 - Accrual Accounting I. RECOGNITION...

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Unformatted text preview: Ch. 4 - Accrual Accounting I. RECOGNITION & MEASUREMENT What should be recorded & how should these transactions be measured? Recognition- formally recording a transx. on the books Measurement - quantify the transx. in terms of dollars at Historical cost (which is reliable, verifiable and objective!) II. CASH vs. ACCRUAL BASIS OF ACCOUNTING A. Cash Basis: B. Accrual Basis: The basic difference between cash & accrual is one of timing ( when revenues and expenses get recorded.) III. ACCRUAL BASIS (Preferred method) 2 concepts: Revenue Recognition Principle and Matching Concept The accrual basis of accounting tells us when to record revenues and when to record expenses. A. Revenue Recognition Principle (GAAP): tells us when to record revenues: Record revenues when the earnings process is complete. B. Matching Concept (GAAP): tells us when to record expenses: Match revenues earned with expenses incurred (used up) in the same accounting period when the expense helped to generate revenue. Examples of Matching: Sell a stereo for $1,000 and deliver the goods. The company had purchased the stereo for $400. Because Accrual Accounting is based on timing and not when cash is received or paid, it will require Adjusting Entries at the end of every accounting period in order to update all revenues (if now earned) and all expenses (if now "used up"). IV. Adjusting Entries Necessary entries that update all unrecorded Revenues & Expenses due to the passage of time. Ensure that Revenue Recognition & Matching principles (accrual accounting) are followed. A. Types of Adjusting Entries- Deferrals (Prepayments) Cash comes first 1. Deferred Revenue 2. Deferred Expense Accruals Cash comes later 3. Accrued Asset 4. Accrued Liability B. Examples of Adjusting Entries:...
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chapter4notes - Ch. 4 - Accrual Accounting I. RECOGNITION...

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