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Kimmel_4e_2000_and_2001_chapter_4_student_version

Kimmel_4e_2000_and_2001_chapter_4_student_version - 4...

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4-1 ACCRUAL ACCOUNTING CONCEPTS Accounting , Fourth Edition 4
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4-2 1. 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 Objectives
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4-3 Generally a month , a quarter , or a year . Fiscal year vs. calendar year Accountants 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 Issues
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4-4 Timing Issues The Revenue Recognition Principle Companies 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.
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4-5 Timing Issues Illustration: 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.
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4-6 Timing Issues “Let the expenses follow the revenues.” SO 1 Explain the revenue recognition principle and the expense recognition principle. Illustration 4-1 (Partial)
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4-7 Accrual-Basis Accounting Transactions recorded in the periods in which the events occur. Revenues are recognized when earned, even if cash was not received. Expenses are recognized when incurred, even if cash was not paid. Timing Issues Accrual versus Cash Basis of Accounting SO 2 Differentiate between the cash basis and the accrual basis of accounting.
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4-8 Cash-Basis Accounting Revenues are recognized only when cash is received. Expenses are recognized only when cash is paid. Prohibited under generally accepted accounting principles (GAAP). Timing Issues SO 2 Differentiate between the cash basis and the accrual basis of accounting. Accrual versus Cash Basis of Accounting
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4-9 Timing Issues Illustration: 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.
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4-10 Adjusting entries - needed to ensure that the revenue recognition and expense recognition principles are followed.
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