Debbie's Comments on Chapter 3

Debbie's Comments on Chapter 3 - Debbies Comments on...

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Debbie’s Comments on Chapter 3 In Chapter 2, we learned that goods and services can be provided or received before cash is exchanged. We recorded revenue and expense transactions even though they did not increase or decrease cash at the time they were recorded. This was called ‘accrual accounting’. In Chapter 3 we’ll learn about deferrals. The difference is as follows: Accruals occur when goods or services are provided to customers or received from vendors PRIOR TO the cash exchange. Deferrals occur when goods or services are provided to customers or received from vendors AFTER the cash exchange (i.e. you DEFER recording the revenue or expense transaction until some time in the future). For example, assume a customer pays a deposit for a service to be provided in the future. The company will earn the revenue (the deposit) when the service is provided. Prior to that time, the deposit is a liability (something the company owes) because the customer will expect a refund if the company does not provide the service as promised. This is an example of a deferral. The deposit would increase cash (an asset) and increase a liability – Unearned Revenue. Don’t let the account name fool you – it’s not revenue yet! When the service is performed, the company can now reflect the revenue by decreasing a
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This note was uploaded on 12/01/2010 for the course BISM 165871 taught by Professor Hannah during the Spring '10 term at Kentucky State University.

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Debbie's Comments on Chapter 3 - Debbies Comments on...

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