201Lec04 - 201Lec04.PPT Accrual Accounting Concepts 1...

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Unformatted text preview: 201Lec04.PPT Accrual Accounting Concepts 1 Generally a month , a quarter , or a year . End of year can be December 31 ( calendar year ) or any other month ( fiscal year ) Accountants divide the economic life of a business into reporting periods (PeriodicityAssumption). Jan. Feb. Mar. Apr. Dec. . . . . . Determines which time period revenues and expenses are recorded. Example : Suppose that Chuck’s Painting Co. paints a large building in 2011. It bills the customer $80,000, but does not receive payment until 2012. What year would you record the revenue? Suppose that in 2011 Chuck pays $50,000 cash for paint and supplies. Half of these were used on the job above. When and how much would you record as expense? Two general methods exist:- Cash Basis- Accrual Basis Accounting Method . . . . . 2 Defined : CASH BASIS Method 3 Record revenue when cash is received . Record expense when cash is paid out . Not GAAP-> We won’t use in class. Possible manipulation. (Receipt or payment of cash can be controlled.) Allowed for Income Taxes ( sometimes) . Defined: ACCRUAL Method 4 Record revenues when earned . (When goods are sold or services performed) Called Revenue Recognition Principle Record expenses when incurred . (When they were used up to produce revenue) Called Matching Principle . GAAP -> We will concentrate on in class. Requires adjustments and additional accounts . Chuck’s Painting Co . 5 2011 2012 Revenue $80,000 Expense-25,000 Net Income $55,000 Revenue $ Expense-50,000 Net (loss) $(50,000) Revenue $ Expense- Net Income $ Revenue $ 80,000 Expense- Net (loss) $ 80,000 Are used to handle inter-period timing issues Split up a revenue or expense (when needed) and record part of it in one accounting period and the rest of it in a later period. In the previous example 1/2 of the paint and supplies. Getting revenues and expenses in the correct accounting periods is referred to as achieving a proper “Cut-Off” of the accounting period . Adjusting Journal Entries (AJE) . . . . . 6 Adjustments needed when: Deferrals: Pay or receive cash but delay putting effect on income statement. Unearned revenues, Prepaid expenses, Supplies, Depreciation Accruals: Revenue or expense is recorded before cash is received or paid. Accrued revenues or Accrued expenses Adjusting Journal Entries (AJE) . . . . . 7 EXAMPLE: Sierra Corporation Trial Balance October 31, 2012 Unadjusted Trial Balance Debit Credit Cash 15,200 Accounts Receivable Advertising Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Accumulated Depreciation Notes Payable 5,000 Accounts Payable 2,500 Unearned Service Rev 1,200 Salaries Payable Common Stock 10,000 Dividends 500 Service Revenue 10,000 Salaries Expense 4,000 Supply Expense...
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This note was uploaded on 03/08/2012 for the course BUS ADM 201 taught by Professor Konkel during the Spring '08 term at Wisconsin Milwaukee.

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201Lec04 - 201Lec04.PPT Accrual Accounting Concepts 1...

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