Chapter 3 - FINANCIALREPORTING PROCESS CHAPTERTHREE...

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CHAPTER THREE FINANCIAL  REPORTING   PROCESS
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PRINCIPLE – Revenue Recognition Revenue is recognized when it is earned not paid Expenses are recognized when it happens
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Accrual vs Cash Basis All individuals are on a cash basis.  Record the  revenue and expense when it is paid in cash.   Small business may also use cash basis. Accrual – “It is a cruel thing not to pay”. Record when it happens not when it paid.   Corporations report on an accrual basis
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PRINCIPLE - Matching To get a true net income expenses should match the  revenue earned in the same period of time. Most important at the end of the year.  If you receive  the revenue in December 2012 but don’t pay your  employees until January 2013—the revenue is in  December 2012 but the expense for that revenue is in  January 2013.
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Tool to match revenue and expenses Adjusting entries  One account must be a balance sheet account, the  other must be an income statement account NO  CASH  in adjusting entries repayments – covers more than one month Rent, supplies, insurance, depreciation
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Types of adjusting entries Prepayments Accrued Expenses and revenue
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Prepayments covers more than one month Rent, supplies, insurance, depreciation Rent – Original Entry Prepaid Rent          Cash Adjusting Entry to record Rent for the current month
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This note was uploaded on 11/20/2011 for the course FINANCE 640,722 taught by Professor Chabiyo,reeves during the Fall '11 term at Ohio State.

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Chapter 3 - FINANCIALREPORTING PROCESS CHAPTERTHREE...

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