Kimmel_4e_2000_and_2001_chapter_4_student_version

Kimmel_4e_2000_and_2001_chapter_4_student_version -...

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Unformatted text preview: 4-1ACCRUAL ACCOUNTING CONCEPTSAccounting, Fourth Edition44-21.Explain the revenue recognition principle and the expense recognition principle.2.Differentiate between the cash basis and the accrual basis of accounting.3.Explain why adjusting entries are needed, and identify the major types of adjusting entries.4.Prepare adjusting entries for deferrals.5.Prepare adjusting entries for accruals.6.Describe the nature and purpose of the adjusted trial balance.7.Explain the purpose of closing entries.8.Describe the required steps in the accounting cycle.Study Objectives4-3Generally a month, a quarter, or a year.Fiscal year vs. calendar yearAccountants divide the economic life of a business into artificial time periods (Periodicity Assumption).SO 1 Explain the revenue recognition principle and the expense recognition principle.Jan.Feb.Mar.Apr.Dec.. . . . .Timing Issues4-4Timing IssuesThe Revenue Recognition PrincipleCompanies recognize revenue in the accounting period in which it is earned.In a service enterprise, revenue is considered to be earned at the time the service is performed.SO 1 Explain the revenue recognition principle and the expense recognition principle.4-5Timing IssuesIllustration:Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be:SO 1 Explain the revenue recognition principle and the expense recognition principle.4-6Timing Issues“Let the expenses follow the revenues.”SO 1 Explain the revenue recognition principle and the expense recognition principle.Illustration 4-1 (Partial)4-7Accrual-BasisAccounting►Transactions recorded in the periods in which the events occur.►Revenuesare recognized when earned, even if cash was not received. ►Expensesare recognized when incurred, even if cash was not paid.Timing IssuesAccrual versus Cash Basis of AccountingSO 2 Differentiate between the cash basis and the accrual basis of accounting.4-8Cash-BasisAccounting►Revenues are recognized only when cash is received.►Expenses are recognized only when cash is paid. ►Prohibited under generally accepted accounting principles (GAAP).Timing IssuesSO 2 Differentiate between the cash basis and the accrual basis of accounting.Accrual versus Cash Basis of Accounting4-9Timing IssuesIllustration:Suppose that Fresh Colors paints a large building in 2011. In 2011, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2012.Illustration 4-2 (Partial)SO 2 Differentiate between the cash basis and the accrual basis of accounting.4-10Adjusting entries- needed to ensure that the revenue recognitionand expense recognition principles are followed....
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This note was uploaded on 02/27/2012 for the course ACCT 2000 taught by Professor Holmes during the Spring '08 term at LSU.

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Kimmel_4e_2000_and_2001_chapter_4_student_version -...

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