ACC231 - Wk 03 - Student Materials

ACC231 - Wk 03 - Student Materials - ACC231 - Fall 2009...

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Fall 2009 Copyright © School of Accountancy, Arizona State University Week 3 – Page 1 ACC231 - Fall 2009 Week 3 Overview (September 9 - September 14) Material we cover this week Solid Footing Chapters 7 and 9 (page 141 to middle of 143) What are we learning this week? 1. Accounting Assumptions and Principles 2. Adjusting Journal Entries Detail of Information you should know: 1. Accounting Assumptions and Principles a. Revenue Recognition Principle b. Matching Principle 2. Adjusting Journal Entries a. Conceptually Understand and be able to prepare adjusting journal entries for i. Property, Plant and Equipment (Depreciation) ii. Prepaid Assets (Deferred Expenses) iii. Accrued Liabilities (Accrued Expenses) NOTE: You will be given the formulas for depreciation and interest expense on the exam and do not need to memorize these. SL depreciation formula (Original amount paid – Salvage Value) X 1/Life of asset in months = monthly depreciation (Original amount paid – Salvage Value) X 1/Life of asset in years = yearly depreciation amount Interest expense formula Principal amount of loan x interest rate x 1/12 = monthly interest expense
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Fall 2009 Copyright © School of Accountancy, Arizona State University Week 3 – Page 2 WEEK 3 - TERMINOLOGY AND CONCEPTS Items are definitional in nature. We may or may not review these items in Mega but you are responsible for knowing this information for homework, quizzes and exams. Under Accrual Accounting, revenues and expenses are recorded when events take place, WITHOUT regard to receipt or payment of cash. The two principles below relate to accrual accounting - one relates to revenue and one to expenses. These principles guide when revenue and expenses are recognized (recorded) in the accounting records. Accounting Assumptions and Principles This principle addresses how revenue should be recorded (recognized) under accrual accounting. Revenue should be recorded when it is EARNED, regardless of when cash is received. This is why we record sales and accounts receivable - even though the business has not received the cash, they have earned the revenue. Revenue is recognized (recorded) when BOTH of the following conditions are met: Revenue Recognition Principle 1 - Revenue has been earned (e.g. goods delivered to customer or services performed) 2 - Collection of cash is reasonably assured (this mainly relates to very special circumstances where you sell goods/services to someone but aren't assured of the amount to be received or whether you'll even be able to collect the cash. For now, we assume that the collection of cash is reasonably assured and we discuss this in more detail in Module 2). This principle is the basis for the adjusting entries we learn in Week 4 (Deferred and Accrued Revenue). This principle addresses how expenses should be recorded (recognized) under accrual accounting. Under
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ACC231 - Wk 03 - Student Materials - ACC231 - Fall 2009...

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