Ch03 - ACCT 1710 Introduction To Financial Accounting...

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1 ACCT 1710 Introduction To Financial ACCT 1710 Introduction To Financial Accounting Accounting ACCT 1710 Introduction To Financial Accounting Accounting Dr. HU Bing b ing HKBU Chapter 3 Adjusting the Accounts
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2 Study Objectives Study Objectives 1 The time period assumption. 2 The accrual basis of accounting. 3 Revenue recognition principle, and matching principle 4 Why adjusting entries are needed. 5 4 major types of adjusting entries. 6 The adjusted trial balance.
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3 A business entity may operate continuously. However, users need information periodically. Valuation Evaluation management performance Time period assumption assumes-- the economic life of a business can be divided into artificial time periods for the purpose of financial reporting . A month , a quarter , or a year . The accounting time period that is one year in length A fiscal year (usually coincides with calendar year). TIME PERIOD ASSUMPTION TIME PERIOD ASSUMPTION Regular financial reporting Regular financial reporting
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4 ACCRUAL- vs. CASH-BASIS ACCOUNTING ACCRUAL- vs. CASH-BASIS ACCOUNTING Cash-basis accounting   Re ve nue  is  re c o rde d in the  pe rio d in whic h   c as h is  re c e ive d Expe ns e s  are  re c o rde d in the  pe rio d in whic h  c as h is  paid . S im ple  b ut im pre c is e , s uita b le  fo r s m all b us ine s s e s , e .g . a  fruit  s ta nd. Accrual-basis accounting:  transactions recorded in the  periods in which  the events occur . Revenues are recognized when  earned  ( Revenue Recognition ) Expenses are recorded when  incurred  ( Matching Principle ) IFRS require  accrual-basis  accounting Better matches expenses with revenues Provides more accurate performance measures
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5 RECONIZING REVENUES AND EXPENSES RECONIZING REVENUES AND EXPENSES The revenue recognition principle: revenue should be recognized in the accounting period in which it is earned . For service business, the service is performed . For merchandise, the goods are delivered . The matching principle: expense should be recorded in the period in which the expense makes contribution to produce revenues. Efforts ( expenses ) are matched with accomplishments ( revenues ) in the same period.
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6 Revenue Recognition Principle Revenue Recognition Principle Jan.1 Mar.1 Received order and cash advancement and cash advancement Completed decoration Completed decoration Example1: Home Decorating Inc. Example1: Home Decorating Inc. Revenue Revenue Sep.1 Oct.1 Nov.1 Example2: Dry Cleaning Inc. Example2: Dry Cleaning Inc. Customer picked up clothes and made payment Customer picked up clothes and made payment Cleaned clothes clothes Revenue Revenue Feb.1
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7 Matching Principle Matching Principle Paid rent for 2 months starting July 1 Paid rent for 2 months starting July 1 June 1 July 1 Aug. 1 Rent expense Rent expense Rent expense Rent expense Consumed utilities Consumed utilities Made payment on utility bill Made payment on
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This note was uploaded on 01/19/2012 for the course ECON 201 taught by Professor Wong during the Spring '11 term at CUHK.

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Ch03 - ACCT 1710 Introduction To Financial Accounting...

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