Reimersppt_ch04 - Chapter 4 Accrual Accounting Concepts and...

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Chapter 4 Accrual Accounting Concepts and the Accounting Cycle
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In Chapter 3 You learned how to: o Prepare Journal Entries o Prepare an Unadjusted Trial Balance o And use the Unadjusted Balances to prepare Financial Statements
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We made it through Step 3 of the Accounting Cycle
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In this chapter we need to complete the cycle…
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Did she say WRONG!? All of the transactions were recorded correctly Here are the financial statements from Chapter 3 The unadjusted trial balance was in balance… And so was the balance sheet… Too Bad the Balances are wrong!
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What’s the Accrual Basis of Accounting!? Our Cash Balance is Correct! How can the balances be wrong… Every Cash Receipt and Disbursement was recorded. So what are we missing? Financial Statements must be prepared using the Accrual Basis of Accounting
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The Accrual Basis is required by GAAP Not just the Cash Flow…. . And the Matching Principle. Can you give us a refresher on those? The Accrual Basis of Accounting looks at the economic activity… Right! Two important Principles are the Revenue Recognition Principle Generally Accepted Accounting Principles, right?
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Revenue Recognition Principle Requires that revenues be recorded in the time period when the work is performed. The Earnings process is complete. Governs the Timing of Revenues
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Income Statement Revenues: Service Revenue 45,000 Rental Revenue 0 Total Revenues 45,000 Expenses: Wages Expense 26,300 Equipment Rental Expense 1,500 Rent Expense 0 Advertising expense 2,600 Repairs Expense 900 0 0 Total Expenses 31,300 Net Income (Loss) 13,700 Revenue  Recognition  Principle
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Matching Principle Requires that expenses be recorded in the same time period as the revenues they helped generate. Governs the Timing of Expenses
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Income Statement Revenues: Service Revenue 45,000 Rental Revenue 0 Total Revenues 45,000 Expenses: Wages Expense 26,300 Equipment Rental Expense 1,500 Rent Expense 0 Advertising expense 2,600 Repairs Expense 900 0 0 Total Expenses 31,300 Net Income (Loss) 13,700 Revenue  Recognition  Principle Matching  Principle 
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Here’s an example of adhering to the matching principle…. . The unadjusted balance in the Supplies account may not be accurate. Just because we purchased $500 of supplies……
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Doesn’t mean we still have them. 500 0 0 0 0 Supplies Unless we used none of the supplies the balance in Supplies is   TOO HIGH!
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And the Balance in Supplies Expense 500 0 0 0 0 0 Supplies Supplies Expense  is TOO LOW!
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What Happened? The Journal Entry Process (at the time of Purchase) Was not simultaneous with the Economic Activity (Usage of the supplies) It would be silly to prepare a journal entry every time we used the stapler?!
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In order for the financial statements to be correct…. 0 0 0 0 The Economic Activity needs to be recorded This is done by recording an Adjusting Entry Recording Supplies Expense of $350 in the time period when we actually used the supplies is an Example of the Matching Principle 500 350 350 150 0 350 0 Supplies Supplies Expense
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It’s all about Timing!
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Reimersppt_ch04 - Chapter 4 Accrual Accounting Concepts and...

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