121_03SG - Chapter 3Accrual Accounting and the Financial...

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54 Chapter 3 Chapter 3—Accrual Accounting and the Financial Statements CHAPTER OVERVIEW Chapter Three continues the discussion begun in Chapter Two concerning the recording of business transactions using debit and credit analysis. Therefore, you should feel comfortable with the debit and credit rules when you begin. In this chapter, you will learn about the adjusting process which takes place prior to the preparation of the financial statements. In addition, you are introduced to the closing process. The specific learning objectives for this chapter are to 1. Distinguish accrual-basis accounting from cash-basis accounting. 2. Apply the revenue and matching principles. 3. Make adjusting entries at the end of the accounting period. 4. Prepare the financial statements. 5. Close the revenue, expense, and dividends accounts. 6. Correct typical accounting errors. 7. Use the current and debt ratios to evaluate a business. CHAPTER REVIEW Objective 1 - Distinguish accrual-basis accounting from cash-basis accounting. In cash-basis accounting , transactions are recorded only when cash is received or paid. In accrual-basis accounting , a business records revenues as they are earned and expenses as they are incurred, without regard to when cash changes hands. Revenues are considered earned when services have been performed or merchandise is sold because the provider has a legal right to receive payment. Expenses are considered incurred when merchandise or services have been used. GAAP requires that businesses use the accrual basis so that financial statements will not be misleading. Financial statements would understate revenue if they did not include all revenues earned during the accounting period and would understate expenses if they did not include all expenses incurred during the accounting period. Accountants prepare financial statements at specific intervals called accounting periods. The basic interval is a year, and nearly all businesses prepare annual financial statements. Usually, however, businesses need financial statements more frequently at quarterly or monthly intervals. Statements prepared at intervals other than the one-year interval are called interim statements . Whether financial statements are prepared on an annual basis or on an interim basis, the time-period concept ensures that accounting information is prepared at regular intervals. The cutoff date is the last day of the time interval for which financial statements are prepared. All transactions that occur up to the cutoff date should be included in the accounts. Thus, if financial statements are prepared for January, all transactions occurring on or before January 31 should be recorded. Objective 2 - Apply the revenue and matching principles.
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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.

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121_03SG - Chapter 3Accrual Accounting and the Financial...

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