chapter_03-acc_111-ku-adjusted.docx

chapter_03-acc_111-ku-adjusted.docx - Ch 3 Financial...

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Ch 3 : Financial Accounting IFRS FA 111-KU The Accounting Period: The basic accounting period is one year, For most companies, the annual accounting period runs the calendar year from January 1 through December 31, Other companies use a fiscal year , which ends on a date other than December 31 Companies also prepare financial statements for interim periods (less than one year) such as monthly, quarterly, and semiannually Methods of Accounting: There are two accounting basis : Accrual Basis: Companies record transactions in the periods in which the events occur. Revenues are recognized when earned, rather than when cash is received. Expenses are recognized when incurred, rather than when paid. Medium and large companies use accrual base of accounting. Cash Basis: Companies record transactions in the periods in which Cash is received or paid. Revenues are recognized when cash is received. Expenses are recognized when cash is paid. Cash-basis accounting is not in accordance with International Financial Reporting Standards (IFRS). Exercise: Smart Touch received a bill for a $200 advertising expense on Dec 15, 2010, and paid the amount in full on January 3, 2011. Accrual Accounting Cash Basis accounting Date Explanation Dr. Cr. Date Explanation Dr. Cr. Dec 15 Advertising Exp 200 Dec 15 No Entry Advertising Payable 20 0 Jan 03 Advertising Payable 200 Jan 03 Advertising Exp 200 Cash 20 0 Cash 200 Exercise 3-3 (a) Cash received from revenue .................................................................... $105,000 Cash paid for expenses ............................................................................ (72,000) Cash-basis net income ............................................................................. $ 33,000 (b) Revenues [($100,000 – $25,000) + $40,000] ......................................... $121,000 Expenses [($70,000 – $30,000) + $42,000] ............................................ (79,000) Accrual-basis net income ........................................................................ $ 42,000 Page 1 of 10 By : Ehab Abdou [97672930]
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Ch 3 : Financial Accounting IFRS FA 111-KU Accounting Principles: 1. Cost Principle (Historical Cost Principle) dictates that companies record assets at their cost when purchased and reported these assets over the time the asset is held by its Historical Cost. 2. Fair Value Principle (Historical) dictates that companies record assets at their cost when purchased and Reported assets and liabilities at Fair Value. Especially in situations where assets are actively traded. 3. Revenue recognition principle. dictates that companies recognize revenue when it is probable that future economic benefit will flow to the company and reliable measurement of the amount of revenue is possible.(When it is earned) In a service enterprise, revenue is considered to be earned at the time the service is performed. 4. Expenses recognition principle. States that expenses occur when a company either uses up assets or incurs liabilities as a result of its efforts to generate revenue.(When it is incurred) Adjusting Entries: Adjusting entries - needed to ensure that the revenue recognition and expense recognition are followed. As a result we have to make the following: 1. To Convert some assets into expenses. (Prepayments) 2. To Convert Some Liabilities into revenue. (Unearned ) 3. To Record any Unrecorded expenses ( Accrued expenses) 4. To record any Unrecorded revenues (Accrued revenues) Converting Some assets into expenses: (1) Supplies (2) Prepaid (3) Depreciation
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  • Spring '17
  • ibu rosinta
  • Generally Accepted Accounting Principles, Ehab Abdou

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