ACIS3115 Chapter 3 Appendix A

ACIS3115 Chapter 3 Appendix A - Chapter 3 Appendix 3A...

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1 Chapter 3 Appendix 3A Cash-Basis Accounting vs. Accrual-Basis Accounting
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2 Overview Differentiate the cash basis accounting from the accrual basis accounting.
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3 Accrual Basis Accounting Regardless of receipt or payment of cash, Recognize revenue when it is earned Recognize expenses in the period incurred Recognizes all aspects of the credit phenomenon. Receivables and payables are forecasters of future cash inflows and outflows. Accrual basis accounting aids in predicting future cash flows by reporting transactions and other events with cash consequences at the time the transactions occur, rather than when the cash is received and paid.
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4 Cash Basis Accounting Recognize revenue when companies receive cash. Record expenses when companies disperse cash. NOT in conformity with GAAP because it ignores two principles Revenue recognition principle Matching principle
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5 Example January: Construction has begun. Incurs costs of $18,000 on credit . Delivers a finished good. February: Collects $22,000 from the customer. March: Pays the $18,000 due the creditors. TIME
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6 Journal Entries Accrual Basis January: Dr) A/R 22,000 Cr) Revenue 22000 Dr) Oper. Exp. 18,000 Cr) A/P 18,000 February Dr) Cash 22,000 Cr) A/R 22,000 March Dr) A/P 18,000 Cr) Cash 18,000
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7 Journal Entries (Cont) Cash Basis January: None February Dr) Cash 22,000 Cr) Revenue 22,000 March Dr) Oper. Exp. 18,000 Cr) Cash 18,000
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8 Example (Cont) Accrual Basis Income Statement January February March Total Revenue 22,000 - - 22,000 Expenses 18,000 - - 18,000 Net Income (loss) 4,000 - - 4,000 Accrual Basis Income Statement
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9 Example (Cont) Cash Basis Income Statement January February March Total Cash Receipts - 22,000 - 22,000 Cash Payments - - 18,000 18,000 Net Income (loss) - 22,000 (18,000) 4,000 Cash Basis Income Statement
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10 Example (Cont) Cash Basis Income Statement is not consistent with accounting theory: In January, it understates revenues and expenses. In February, it overstates revenues. In March, it overstates expenses. January February March Total Revenue 22,000 - - 22,000 Expenses 18,000 - - 18,000 Net Income (loss) 4,000 - - 4,000 Accrual Basis Income Statement January February March Total Cash Receipts - 22,000 - 22,000 Cash Payments - - 18,000 18,000 Net Income (loss) - 22,000 (18,000) 4,000 Cash Basis Income Statement
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11 Example (Cont) Accrual Basis Balance Sheet January February March Assets Cash - 22,000 4,000 Account Receivable 22,000 - - Total Assets 22,000 22,000 4,000 Liabilities and Owners' Equity Account Payable 18,000 18,000 - Owners' Equity 4,000 4,000 4,000 Total liabilities and owners' equity 22,000 22,000 4,000 Accrual Basis Balance Sheet
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12 Example (Cont) Accrual Basis Balance Sheet Account receivable represents a near-term future cash inflow.
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