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Unformatted text preview: Accrual Accounting & Matching Concept Accrual Accounting - Accruals - recognize an earnings event before cash is exchanged Deferrals - recognize an earnings event after cash is exchanged NOTE: a "Cost" might be either an asset or an expense Requires companies to recognize revenue in the period in which the work is done regardless of when cash is collected and to MATCH expenses incurred to earn that revenue regardless of when cash is paid (Matching Concept) Conservatism-guides accountants to select the alternative that produces the lowest amount of net income Period Costs - Expenses that are matched with the period in which they are incurred- a Cost is an asset if it has not yet consumed a purchased resource in the process of earning revenue (Examples: Prepaids, Inventory)- a Cost is an expense if it has consumed a purchased resource in the process of earning revenue Remember: Revenue represents a benefit to the company that results in an increase in assets or a decrease in liabilities from providing goods and services to customers (operating activities) Expenses represent a decrease in assets or an increase in liabilities resulting from operating activities undertaken to generate revenue Accruals Cash Received/Paid AFTER Work Performed/Expense Incurred Accruals: Accrued Revenues: Revenues earned, but cash not yet received (Asset Accounts) Examples: Interest Receivable - Interest earned on an Account Receivable or Note Receivable Accrued Expenses: Expenses or costs incurred, but not yet paid (Liability Accounts) Examples: Accrued Salaries, Accrued Rent, etc. Interest Payable - Interest owed on an Account Payable or Note Payable Business Example: Bakery 1/1/11-Deliver wedding cake. Billed customer $100 delivery fee due in 20 days. Incurred employee salary expense of $50. Employees are paid the first day of the following month.1/1/11-Deliver wedding cake....
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