Understanding%20Accruals

Understanding%20Accruals - 1 Accrual Accounting and...

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1 Accrual Accounting and Financial Reporting in Hong Kong
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2 1. Accounting Principles and Concepts
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3 Concepts and Principles The Entity Concept The business entity is separate from its owners The Reliability Principle Accounting records are based on the most objective evidence available The Cost Principle Assets and services are recorded at actual (historical) cost The Going Concern Concept The assumption that the entity will remain in operation long enough to use existing assets for their intended purpose The Stable-Monetary-Unit Concept The assumption that the monetary unit’s purchasing power is stable (ignores inflation)
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4 2. Accrual accounting and cash flows
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5 Accrual vs Cash Accounting Accrual Accounting Impact of business transactions are recorded when the transaction occurs Revenues are recognized when earned . Expenses are recognized when incurred. Cash Accounting Transactions are recorded when cash is received or paid. Revenues are recorded when cash is received . Expenses are recorded when cash is paid .
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Business Deals B u s i n e   D a l Beginning of Year End of Year Income Measurement
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7 Accrual vs Cash Accounting Under accrual accounting, cash transactions are recorded as well as noncash transactions such as: Purchases of inventory on account Sales on account Depreciation expense Accrual of expenses incurred but not yet paid Usage of prepaid rent, insurance, and supplies
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8 Accrual vs Cash Accounting Generally accepted accounting principles (GAAP) require that business use accrual accounting.
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9 Ethical Issues in Accrual Accounting Accruals require the use of judgment to determine which period should reflect revenues earned. Managers should not use accruals to “smooth” income by delaying or accelerating recognition of either revenues or expenses.
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What has this company done? Sales of PT900 in first quarter of 2003: --- 6000 pieces (Total productivity in 2003: 112) Sales of diamond in first quarter: ---2302.45 carat / (Total productivity in the year: 926.3) Sales of Golden Kalium in 3rd quarter--- 60133.09 g /(Total productivity: 0)
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11 3. Adjusting the accounts
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The Adjusting Process Prepare a trial balance. Review trial balance and other records for adjusting entries - basic categories of adjusting entries: Accruals Deferrals Depreciation Prepare and post adjusting entries. Prepare an adjusted trial balance to ensure
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This note was uploaded on 02/04/2012 for the course ACCT 3111 taught by Professor Zhang during the Spring '11 term at CUHK.

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Understanding%20Accruals - 1 Accrual Accounting and...

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