Ch3. - The Accrual Basis of Accounting Chapter 3 A200 The...

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

View Full Document Right Arrow Icon
The Accrual Basis of Accounting Chapter 3 A200
Background image of page 1

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

View Full DocumentRight Arrow Icon
The difference between Cash Basis accounting and Accrual Basis accounting is the point in time that Revenues or Expenses are recorded. Cash Basis Accrual Basis Revenue is recorded When Cash When revenue is received is earned* even if cash is not received. Expenses are recorded When Cash When expenses is paid are incurred* in generating revenues even if cash is not paid. * Earned = You’ve done the work and have a right to be paid. Incurred = Come up and must be paid either immediately or in the future. This properly matches revenues with expenses in the same accounting period which is what the Matching Principle of accounting says must be done.
Background image of page 2
Under the accrual basis of accounting, Revenues are recorded as income is earned , not necessarily when cash is received. 10/1 Pawpaw Health Care Inc. received $4,500 from Embark Co. for 6 months of rent to use the vacant office in Pawpaw Health Care’s building. The entry is + Cash $4,500 and + Unearned Rent $4,500. Assets = Liabilities + Equity Cash Unearned Rent C/S R/E + $4,500 = + $4,500 Revenues – Expenses = Net Income 0 = 0 notice: we received cash, but did not record revenue. This is called a Deferred Revenue because we have to Delay recording Revenue until Revenue is actually earned (even though they’ve already paid us the cash.)
Background image of page 3

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

View Full DocumentRight Arrow Icon
At the end of the first month, 10/31, we adjust the accounts to reflect 1 month of rent actually earned. ($4,500/6months = $750 per month earned)
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 02/09/2011 for the course ACCT 200 taught by Professor Valades during the Spring '11 term at University of Tennessee.

Page1 / 10

Ch3. - The Accrual Basis of Accounting Chapter 3 A200 The...

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