Chap3 Class Notes 2010

Chap3 Class Notes 2010 - C:\Documents and...

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C:\Documents and Settings\katycck_acy\Desktop\TA assignment\ACCT 2111Victor\Contents\Chap3 Class Notes 2010.DOC Victor Leung ACCT2111, 2010, Chapter 3 1 CHAPTER THREE Adjusting Accounts I. (Obj. 01) Time Period Assumption Time period assumption (periodicity assumption) assumes the economic life of a business can be divided into artificial time periods (calendar year, fiscal year, interim periods). II. (Obj. 02) Accrual basis accounting A. Revenue recognition principle states that revenue should be recognized in the accounting period in which it is earned. B. Matching principle requires that all expenses incurred should be matched with the revenue they generated during a period of time whenever it is reasonable and practicable to do so. Follow the approach of ‘let expenses follow revenues’. Cause-and-effect relation -- incur expenses/costs in order to earn revenues. C. Accrual basis accounting (generally accepted accounting principle). Revenues are recognized in the period earned, and expenses are recognized in the period incurred in the process of generating revenues. III. Cash-Basis and Accrual-Basis Accounting A. Accrual basis 1. Revenues are credited to the period in which revenues are earned. 2. Expenses are matched with revenues. 3. Net income is the differenc e between revenues earned and the expenses incurred in earning those revenues. 4. Adjustments are made for accrued and deferred (prepaid and unearned) items. 5. No consideration is giving to when cash is received and paid. B. Cash basis 1. Record an economic activity (transaction) only when cash is received or paid. Revenues are reported as being earned in the accounting period (a) Cash must be received (b) The receipt of cash must relate to delivering or producing goods, rending services, or conducting other business activities. Expenses are recorded in the accounting period (a) Cash must be paid (b) The payment must relate to delivering or producing goods, rending services, or conducting other business activities. 2. Net income is the differenc e between cash receipts for revenues and cash payments for expenses. 3. No adjustment is made for prepaid, unearned, and accrued items.
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C:\Documents and Settings\katycck_acy\Desktop\TA assignment\ACCT 2111Victor\Contents\Chap3 Class Notes 2010.DOC Victor Leung ACCT2111, 2010, Chapter 3 2 Cash-Basis and Accrual-Basis Accounting Accrual basis accounting (GAAP) Cash basis accounting Revenue Recognition Principle Revenue recognized in the accounting period in which it is earned. Time Period Assumption Economic life of business can be divided into artificial time period. Matching Principle Expense matched with revenues in the period when resources are used to generate the revenues.
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C:\Documents and Settings\katycck_acy\Desktop\TA assignment\ACCT 2111Victor\Contents\Chap3 Class Notes 2010.DOC Victor Leung ACCT2111, 2010, Chapter 3 3 III. (Obj. 03) Adjusting entries 1. The entries required at the end of an accounting period to bring the revenue and
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This note was uploaded on 02/04/2012 for the course ACCT 2111 taught by Professor Eric during the Spring '11 term at CUHK.

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Chap3 Class Notes 2010 - C:\Documents and...

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