Lecture 4 - Student 3PP

Lecture 4 - Student 3PP - Accrual Accounting Concepts...

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Unformatted text preview: Accrual Accounting Concepts Chapter 3 Slides provided by John Wiley Ltd Adapted by Sharron ONeil Accounting 1a | ACCT1001 Learning Objectives 9 Differentiate between a cash and accrual basis of accounting 9 Appreciate the influence of the conceptual framework Explain and recognise revenue items Explain and recognise expense items 9 Explain why adjusting entries are needed and identify the major types of adjusting entries 9 Prepare adjusting entries for prepayments and accruals Concepts for Review Recall the accounting cycle: Step 1: Recognise and analyse transactions Step 2: Journalise the transactions Step 3: Post journals to the general ledger Step 4: Prepare a Trial Balance Extending the Accounting Cycle 1. Identify Transactions (ie recognise & analyse) 2. Record in Journal(s) 3. Post to General Ledger 4. Prepare a Trial Balance 5. 5. Prepare end Prepare end-of of-period Adjusting Entries period Adjusting Entries 6. 6. Prepare an Adjusted Trial Balance Prepare an Adjusted Trial Balance 7. Prepare Financial Statements 8. Close all Temporary Accounts 9. Prepare a Post-Closing Trial Balance 10. Prepare and post Reversing Entries Adjusting entries Its all about timing Period assumption Revenue recognition criteria Expense recognition criteria Asset & Liability Recognition criteria Economic life of business can be divided into artificial periods Expenses recognised in the period when the reduction in assets or increase in liabilities become probable and can be measured reliably Revenues recognised in the period in which the increase in assets of decrease in liabilities become probable and can be measured reliably Form part of generally accepted accounting principles (GAAP) Key assumptions Cash versus Accrual Accounting Accrual-based accounting Revenue is recognised when ____________________. Expenses are recognised when ____________________ Cash-based accounting Revenue is recognised when ___________________. Expenses are recognised when ___________________. Example: Cash versus Accrual Consider the following events for a Jims Mowing franchise owner Received $100 payment from customer Mowed lawns on credit for $100, used $50 petrol Purchased petrol for lawn mower petrol cost $500 Transaction: July June May Month: Income = Expenses = Profit = Income = Expenses = Profit = Income = Expenses = Loss = Cash basis: (NOT the approach to use) Income = Expenses = Profit = Income = Expenses = Profit = Income = Expenses = Profit = Accrual basis: (This is the approach we must use) Adjusting Entries Under Accrual-based accounting we prepare general journal entries (called Adjusting entries) at the end of the accounting period. at the end of the accounting period....
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Lecture 4 - Student 3PP - Accrual Accounting Concepts...

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