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Chapter 4 Notes - CHAPTER 4 Accrual Accounting Concepts...

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CHAPTER 4 Accrual Accounting Concepts Study Objectives 1. Explain the revenue recognition principle and the matching 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. 9. Understand the causes of differences between net income and cash provided by operating activities. 10. Describe the purpose of the basic form of a worksheet. 4-1
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Chapter Outline Study Objective 1 - Explain the Revenue Recognition Principle and the Matching Principle Determining the amount of revenues and expenses to report in a given accounting period can be difficult. Proper reporting requires an understanding of the nature of the company’s business. Two principles are used as guidelines: 1. revenue recognition principle 2. matching principle The revenue recognition principle requires that revenue be recognized in the accounting period in which it is earned. A service company recognizes (records) revenue when the services are performed . The matching principle requires that efforts ( expenses) be matched with accomplishments ( revenues ). The critical issue is determining when the expense makes its contribution to revenue. Study Objective 2 - Differentiate Between the Cash Basis and the Accrual Basis of Accounting With cash basis accounting , revenue is recognized (recorded) when cash is received. Expenses are recognized (recorded) only when cash is paid. Accrual basis accounting requires accountants to adhere to the revenue recognition principle and the matching principle. Cash basis accounting does not satisfy the requirements of Generally Accepted Accounting Principles (GAAP) , whereas accrual basis accounting does. Accrual basis accounting provides an objective measurement of net income. 4-2
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Study Objective 3 - Explain why Adjusting Entries are Needed, and Identify the Major Types of Adjusting Entries o Adjusting entries are needed to ensure that the revenue recognition and matching principles are followed .
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