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Lecture06 - Lecture 6 Accruals and Deferrals Accounting...

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1 Lecture 6 Accruals and Deferrals, Accounting Misstatements, and Academic Research
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2 Review Recognized revenues (i.e. sales) and realized gains are recorded on which side of the T- account? Recognized expenses and realized losses are recorded on which side of the T-account? What happens to all income statement T- accounts at the end of the period? Where are all I/S T-accounts summarized to?
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3 Today Deferrals—when cash changes hands before the revenue or expense is recognized Accruals—when the revenue or expense is recognized before cash changes hands Understanding the effects of mistakes and misstatements on deferrals and accruals Hall of shame Taste of academic research
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4 Adjusting Entries There are two types of adjusting entries. ACCRUALS ACCRUALS Revenues recognized or expenses incurred without cash exchanging hands yet Revenues recognized or expenses incurred without cash exchanging hands yet DEFERRALS DEFERRALS Payment of cash in advance of an expense or receipt of cash in advance of revenue Payment of cash in advance of an expense or receipt of cash in advance of revenue
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5 End of accounting period. Cash received or paid. Revenues earned or expense incurred Examples include insurance expense paid in advance (a prepaid expense) and rent received in advance (an unearned revenue). Examples include insurance expense paid in Examples include insurance expense paid in advance (a prepaid expense) and rent received in advance (an unearned revenue). received in advance (an unearned revenue). Deferrals
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6 Prepaid Expense - Example 1 On January 1, 2003, Tipton, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. The entry on January 1, 2003, to record the policy on Tipton’s books would appear as follows . . . On January 1, 2003, Tipton, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. The entry on January 1, 2003, to record the policy on Tipton’s books would appear as follows . . . GENERAL JOURNAL Date Description Debit Credit Jan. 1 Prepaid Insurance Expense 3,600 Cash 3,600 This is an ASSET account This is an ASSET ASSET account
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7 Prepaid Expense - Example 1 At the end of 2003, we determine how much of the “prepaid expense” has been used up during the period. Since the policy is for 3 years , we can assume that 1/3 of the policy will expire each year. At the end of 2003, we determine how much of the of the prepaid expense prepaid expense has been used up has been used up during the period. during the period. Since the policy is for 3 years 3 years , we can , we can assume that 1/3 of the policy will expire assume that 1/3 of the policy will expire each year. each year.
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