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accting 301 ch3 min shen

# accting 301 ch3 min shen - CH3 Accrual Accounting and...

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1 CH3 – Accrual Accounting and Income Basis of accounting determines in what accounting period revenues and expenses should be recognized. Cash basis accounting : revenues are recorded when cash is received, and expenses are recorded when cash is paid, regardless of when the revenues are earned and expenses are incurred. Limitations: Except transactions involving cash, no assets or liabilities are recorded Cash basis net income is misleading Accrual basis accounting : revenues and expenses should be recognized when the transaction occurs, not necessarily when cash is received or paid. GAAP require accrual basis accounting for financial reporting purposes! Two principles: 1. The revenue principle : revenue is recognized when 1) Earnings process is complete 2) An exchange transaction takes place and 3) Collection is reasonably assured Examples: On December 31, 2009, We Fix It CPA firm completed a client audit and collected \$3,000 for the service. How would the fundamental accounting equation be impacted? How much revenue should be recorded in 2009? In 2010? 2009 Effect: A = L + SE 2010 Effect: A = L + SE

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2 Now assume cash is received after the revenue is earned. On December 31, 2009, We Fix It CPA firm completed a client audit and billed them \$4,000 for the service. The cash is to be received in 60 days. How would the fundamental accounting equation be impacted? In 2010? How much revenue should be recorded in 2009? In 2010? 2009 Effect: A = L + SE 2010 Effect: A = L + SE What if cash is received before the revenue is earned? On December 31, 2009, We Fix It CPA firm received a 12-month retainer fee in advance from a customer totaling \$12,000, to provide services each month during 2010. The first month of services will be provided during January, 2010. How would the fundamental accounting equation be impacted? In 2010? How much revenue should be recorded in 2009? In 2010? 2009 Effect: A = L + SE 2010 Effect: A = L + SE 2. The matching principle : expenses are recognized during the period that they are incurred (used up) to earn revenues. 1) Direct cause-effect relation between revenues and expenses 2) Expenses are matched with revenue earned in the same period 3) Expenses are allocated over a series of periods
3 Examples: We Fit It, CPAs employees are paid \$5,000 on December 31, 2009 for services performed during December 2009. How is the fundamental accounting equation impacted? How much salary expense should be recognized in 2009? In 2010?

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accting 301 ch3 min shen - CH3 Accrual Accounting and...

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