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Ch_4wad - Chapter4 ACCRUAL ACCOUNTING CONCEPTS 1...

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1 Chapter 4 ACCRUAL  ACCRUAL  ACCOUNTING  ACCOUNTING  CONCEPTS CONCEPTS
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Critical concepts Which accounts in a trial balance may need to  be adjusted, How to construct any of the 5 adjusting journal  entries (2 for prepaids, 1 for depreciation, and 2  for accruals), How to compose an adjusted trial balance and  use it to write financial statements. The results of the closing process; which  accounts are temporary and which are  permanent
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Accrual Accounting This method requires that transactions  are recorded when they occur  This does not always match when cash is  received or paid Two principles are critical to the accrual  method Revenue Recognition Principle Matching Principle
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4 Revenue Recognition Principle... Dictates that revenue be recognized in  the accounting period in which it is  earned. Is considered earned  when the service has been provided or  when the goods are delivered.
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5 Matching Principle... Requires that  expenses   be  recorded in the same period in  which the  revenues  they helped  produce are recorded. Generally – record expenses when they are  incurred, regardless of when they are  paid.
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Timing Issues Timing Issues SO 1 Explain the revenue recognition principle and the matching principle. SO 1 Explain the revenue recognition principle and the matching principle.
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Cash Basis Accounting Transactions are only recorded  when cash is paid or when cash  is received. Does not follow GAAP
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Comparison of Cash vs. Accrual  methods Cash Basis Purchase of supplies on   account No Entry Payment for supplies Dr   Supplies Cr    Cash Accrual Basis Purchase of supplies on  account Dr   Supplies Cr    Accounts Payable Payment  made  Dr   Accounts Payable Cr    Cash
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Comparison of Cash vs. Accrual  methods Cash Basis Billed customer for work  completed No Entry Received payment from  customer Dr   Cash Cr    Revenues Accrual Basis Billed customer for work  completed Dr Accounts receivable Cr  Revenues Received payment from  customer Dr   cash Cr    Accounts Receivable
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Accrual Basis Accounting The main difference between the methods has  to do with the timing of the transactions. Adjusting Journal Entries are needed to  record revenues and expenses in their  proper time period because sometimes: Cash is paid or collected before the  transaction (prepaid) Transaction occurs before cash is  paid or collected (accrual)
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Types of Adjusting Entries Types of Adjusting Entries 1. Prepaid Expenses.
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