ACCT Exam 2 Study Guide .docx - Exam#2 Study Guide Chapter...

This preview shows page 1 - 3 out of 16 pages.

Exam #2 Study Guide Chapter 3: Accrual Accounting Concepts Summary of the Accounting Cycle 1. Analyze Transactions 2. Journalize Transactions 3. Post to Ledger 4. Prepare a Trial Balance 5. Adjust the Accounts 6. Prepare Financial Statements 7. Close the Accounts Accrual vs. Cash Basis of Accounting - Cash-basis accounting: revenue is recorded when cash is received, regardless of when it is actually earned - Accrual-basis accounting: an alternative to cash-basis that is required by generally accepted accounting principles o Is superior to cash-basis because it links income measurement to selling, the principal activity of the company Key Elements of Accrual Accounting - Time-Period Assumption - Expense Recognition (Matching) principle - Revenue Recognition Principle Time Period Assumption Allows companies to artificially divide their operations into time periods so they can satisfy users’ demands for information - Companies frequently engage in continuing activities that affect more than one time period - Requires companies to assign revenues and expenses to the proper time period - Often a difficult task and is guided by the revenue recognition and mating principles Revenue Recognition Principle Determines when revenue is recorded and reported - Revenue is recognized (or recorded) in the period in which a company satisfies a performance obligation o This typically happens when revenue is “earned” Delivery of goods Service is performed o Not necessarily when a company receives cash o Eventual collection of cash must be reasonably assured The Matching (Expense Recognition) Principle The process of identifying an expense with a particular time period - The key idea is that an expense is recorded when it is incurred, regardless of when cash is paid. - Under accrual accounting, expenses are recognized following the expense recognition (matching) principle, which requires that expenses be recorded and reported in the same period as the revenue that is helped to generate - Should only include expenses that made a contribution to revenue during the period ~ Match Rev.
Cash Basis of Accounting - Cash Basis: o Revenue is recorded when cash received o Expenses recognized when cash is paid - Net Income is easier to manipulate - Departure from GAAP because it violated the Revenue Recognition & Matching Principles Accrual Basis of Accounting - Follows Revenue Recognition & Matching Principles - Transactions are recorded in the time periods of the events - GAAP requires accrual basis - Makes financial statements more useful - Requires adjusting entries! Step 5: Adjusting the Accounts - Result of timing difference between when an expense or revenue is recognized and cash is received or paid - The purpose of all adjustments is to make sure revenues and expenses get recorded in the proper time period.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture