StudyGuideChap04 - CHAPTER 4 Accrual Accounting Concepts...

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2-1 CHAPTER 4 Accrual Accounting Concepts Study Objectives Explain the revenue recognition principle and the matching principle. Differentiate between the cash basis and the accrual basis of accounting. Explain why adjusting entries are needed and identify the major types of adjusting entries. Prepare adjusting entries for prepayments. Prepare adjusting entries for accruals. Describe the nature and purpose of the adjusted trial balance. Explain the purpose of closing entries. Describe the required steps in the accounting cycle.
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2-2 Chapter Outline Study Objective 1 - Explain the Revenue Recognition Principle and the Matching Principle 1. The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned. . Revenue is considered earned when the service has been provided or when the goods are delivered. 2. The matching principle requires that expenses be recorded in the same period in which the revenues they helped produce are recorded. Recall the example in the Chapter Three Study guide. Suppose sales personnel are paid every two weeks. When preparing financial statements for May, the accountant realizes that employees were last paid on Friday, May 22. By May 31, nine days have elapsed and many of the employees have worked seven or more days. The wages of these employees must be included in expenses The same accountant, however, notices that on May 1 the retail establishment renewed its insurance coverage by paying the $12,000 premium on a one-year insurance policy. Is all of the $12,000 an expense of May? No. The insurance policy will be in effect for 12 months. Therefore, $1,000 ($12,000/12 months) should be recognized as expense each month Study Objective 2 - Differentiate Between the Cash Basis and the Accrual Basis of Accounting 1. With cash basis accounting , revenue is recognized when cash is received. Expenses are recognized only when cash is paid. 2. Accrual basis Accounting requires accountants to adhere to the revenue recognition principle and the matching principle. 3. Cash basis accounting does not satisfy the requirements of Generally Accepted Accounting Principles (GAAP) , whereas accrual basis accounting does. Study Objective 3 - Explain why Adjusting Entries are Needed and Identify the major types of Adjusting Entries 1. Adjusting entries are needed to ensure that the revenue recognition and matching principles are followed . 2. Adjusting entries can be classified as either prepayments or accruals . Each of these classes has two subcategories. Study Objective 4 - Prepare Adjusting Entries for Prepayments Prepayments fall into two categories-- prepaid expenses and unearned revenues. 1. Prepaid expenses - expenses paid in cash and recorded as assets until they are used or consumed. Prepaid expenses expire with the passage of time (i. e. rent and insurance) or they are consumed (i. e. supplies). 2.
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This note was uploaded on 04/04/2010 for the course ACCOUTING ACCOUNTING taught by Professor Paigee.gee during the Fall '07 term at N.C. State.

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StudyGuideChap04 - CHAPTER 4 Accrual Accounting Concepts...

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