Chapter 3

Chapter 3 - Accrual Basis Chapter Accounting and Adjusting...

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1 Accrual Basis Accounting and Adjusting Entries Chapter 3
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2 Learning Objectives To learn the accounting principles for recognizing revenues and expenses on an accrual basis To learn how to make adjusting entries at the end of the accounting period.
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3 Time period concept Business requires periodic, timely reporting. Provides a picture of a company’s profitability for each accounting period so that the information users can make informed judgments concerning the company’s performance using timely information.
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4 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 Annual 1 2 Monthly Quarterly Semiannual The Accounting Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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5 Fiscal Year Fiscal year: the accounting period of 12 months for which a company provides annual financial reports. The company’s fiscal year does not necessary coincide with the calendar year.
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6 Periodic reporting To determine the firm’s performance (i.e., profit) for an accounting period requires estimating revenues and expenses for that period. However, the timing of the cash flow may not coincide with the timing of revenue recognition for an accounting period. ABC Inc. Annual Report
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7 Example You are a computer consultant and have signed a contract to design a software for a small company. The job will take about two years, and you will receive $50,000 at the end of the second year when the job is finished. At the end of the first year, you have done half of the job. Should $25,000 be recognized as the revenues you have earned for the first year, although you have not yet received cash?
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8 Accrual-basis Accounting A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.
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9 Revenue Recognition Revenues are recorded when two main criteria are met: Goods and/or services have been delivered. Cash has either been collected or collectibility is reasonably assured.
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10 We have delivered the product to our customer, so I think we should record the revenue earned. Revenue Recognition
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Expense Recognition: The Matching Principle All costs and expenses must be matched with the related revenues in the same accounting period. costs and expenses
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This note was uploaded on 04/18/2011 for the course BUSI 1002 taught by Professor Liu during the Fall '10 term at HKU.

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Chapter 3 - Accrual Basis Chapter Accounting and Adjusting...

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