03 Accrual Accounting and Income

03 Accrual Accounting and Income - 11/01/2011...

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11/01/2011 1 1 Engineering Finance and Economics 3. Accrual Accounting and Income 2 Agenda Accrual accounting versus cash flow Revenue and matching principles Account adjustment Financial statement preparation 3 Cash vs. Accrual Accounting Cash Basis of Accounting revenue is recorded when cash is received expenses are recorded when incurred Accrual Basis of Accounting revenues are recorded when earned expenses are recorded when incurred regardless of when cash is received or paid GAAP requires accrual accounting
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11/01/2011 2 4 The Time Period Concept Businesses need regular progress reports, so accountants prepare financial statements for specific periods and at regular intervals. Monthly Quarterly 5 Revenue Principle The revenue principle governs two things: When to record revenue and… the amount of revenue to record. 6 The Matching Principle It is the basis for recording expenses and includes two steps: Identify all the expenses incurred during the accounting period. Measure the expenses and match expenses against revenues earned.
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11/01/2011 3 7 The Matching Principle Revenue Expense = Net income 8 Ethical Issues in Accrual Accounting “Managing” earnings to meet or beat Bay Street forecasts. Questionable timing of recognizing revenues, and expenses; affects quality of earnings. 9 Adjusting Entries Deferral–is an adjustment for which the business paid or received cash in advance E.g. deferred taxes, prepaid expenses Amortization–is the allocation of the cost of capital asset to expense over the asset’s useful life E.g. depreciation, amortization of patents, goodwill Accrual–is the opposite of a deferral, an adjustment for which the business has not yet received or paid cash but performed a service or used an asset E.g. salary expense, revenue
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11/01/2011 4 10 Tara Inc. Unadjusted Trial Balance April 30, 2009 3 10 $24,800 2,250 700 3,000 16,500 3,200 950 400 $51,800 13,100 450 20,000 11,250 7,000 $51,800 Cash Accounts receivable Supplies Prepaid rent Furniture Accounts payable Unearned service revenue Common shares Retained earnings Dividends Service revenue Salary expense Utilities expense Total 11 3 11 Prepaid Expenses: Rent 3000 Prepaid Rent 3000 Cash On April 1, Tara Inc. prepays three month’s office rent ($3,000) Date Accounts and Explanation Debit Credit Apr. 1 Prepaid Rent ($1000 x 3) 3,000 Cash 3,000 Paid three months’ rent in advance
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This note was uploaded on 07/10/2011 for the course FINANCE MGT337 taught by Professor Huggins during the Spring '08 term at University of Toronto- Toronto.

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03 Accrual Accounting and Income - 11/01/2011...

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