121_03 - CHAPTER 3 Accrual Accounting CASH BASIS ACCOUNTING...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 3 Accrual Accounting CASH BASIS ACCOUNTING Revenue is recorded when cash is received Expenses are recorded when cash is paid CASH-BASIS ACCOUNTING ± Record revenue when cash collected ± Record expense when cash paid CASH-BASIS ACCOUNTING Not allowed by GAAP ± A/R and A/P large ± Manipulate revenues ± Manipulate expenses ACCRUAL-BASIS ± Revenues recorded when earned ± Expenses matched to revenues ± Ignore cash ± Required by GAAP ACCRUAL-BASIS See page 701 ± Time-period concept ± Revenue principle ± Matching principle
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
TIME-PERIOD CONCEPT ± Slice time into small segments ± Financial statements for time periods ± One year ± One quarter ± Interim periods REVENUE PRINCIPLE Record revenues when earned An exchange has taken place. Collection is probable. The earnings process is nearly complete. REVENUE PRINCIPLE Record revenue when it is earned ± Delivered a good ± Performed service At exchange amount MATCHING PRINCIPLE Basis for recording expenses ± Match expenses to revenues ± Natural link, cause and effect, between revenues and expenses PRACTICE QUESTIONS Question 1 ADJUSTMENT PROCESS Some transactions not recorded ± Start and end in different periods ± No documentation received
Background image of page 2
ADJUSTMENT PROCESS Accrual basis requires ± All revenues, expenses on income statement ± Correct ending balances for assets, liability, equity on balance sheet Unadjusted Trial Balance April 30, 2001 Balance Account Title Debit Credit Cash $24,800 Accounts receivable 2,250 Supplies 700 Prepaid rent 3,000 Furniture 16,500 Accounts payable $13,100 Unearned service revenue 450 Common stock 20,000 Retained earnings 11,250 Dividends 3,200 Service revenue 7,000 Salary expense 950 Utilities expense 400 Total $51,800 $51,800 ADJUSTMENT PROCESS ± End of period (month, quarter, year) ± Adjusting journal entries ± Assign revenues to period earned ± Match expenses to revenues ± Update asset, liability, equity accounts ADJUSTMENT PROCESS Summary of the Accounting Cycle January 1 December 31 Adjustments made at the end of period Recorded during period TIMING DIFFERENCES Cash moves in a different period from the recognition of revenue or expense TIMING DIFFERENCES Deferrals Accruals
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
TIMING DIFFERENCES Deferrals ± Also called Prepaids ± Includes Depreciation Accruals ACCRUALS Record revenue, expense before cash moves ± Seller provides goods, services today ± Customers pay later ± ± Provide service, collect in 30 days ACCRUALS End of period Cash received or cash paid Revenues earned or expense incurred Interest earned during the period (accrued revenue) or Wages earned but not yet paid (accrued expense) ACCRUAL ADJUSTMENTS Find this page in your textbook ACCRUALS – The cash transaction occurs later Initially Later Accrued Record an expense Pay cash and Expenses and the related payable: decrease the payable: Expense xxx Payable xxx P a y a b l e
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/24/2010 for the course ACCOUNTING 31609 taught by Professor R.ambrose during the Fall '09 term at San Mateo Colleges.

Page1 / 17

121_03 - CHAPTER 3 Accrual Accounting CASH BASIS ACCOUNTING...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online