Chapter 2 - Chapter Two Accrual Acctg! Accounting for...

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The McGraw-Hill Companies, Inc. 2006 McGraw-Hill/Irwin Chapter Two- Accrual Acctg! Accounting for  Accruals and  Deferrals
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2-2 Cash Basis vs.  Accrual Accounting Recognition Realization Formally recording  an economic item or event in the financial statements Collecting cash,  generally from the  sale of products or  services
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Steps in an Accounting Cycle Record  Transactions Adjust  Accounts Prepare  Statements Close Nominal  Accounts-  Temp. Accts Know this!!
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Accrual Accounting Virtually all of  the major  companies  operating in the  United States  use accrual  accounting. What is it? It means you earned  Revenue  BEFORE  cash comes in and/or  you incurred an  Expense or bought  an asset BEFORE  cash went out.
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Matching Concept The objective of accrual accounting is to improve matching of revenues with expenses. Cash basis accounting can distort the measurement of net income because it sometimes fails to properly match revenues with expenses. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred.
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Event 2:  During 2009, Conner Consultants provided  $84,000 of consulting services to its clients but no  cash has been collected. 1. Increase assets  (accounts receivable). 2. Increase stockholders’  equity (retained  earnings). Asset Source  Transaction = Liab. + Cash + Accounts Receivable = Salaries Payable + Common Stock + Retained Earnings Revenue - Expenses = Net Income n/a + 84,000 = n/a + n/a + 84,000 84,000 - n/a = 84,000 n/a Assets Stockholders' Equity Cash Flow
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Event 3:  Conner collected $60,000 cash from  customers in partial settlement of its accounts  receivable. 1. Increase assets (cash). 2. Decrease assets  (accounts receivable). Asset  Exchange  Transaction = Liab. + Cash + Accounts Receivable = Salaries Payable + Common Stock + Retained Earnings Revenue - Expenses = Net Income 60,000 + (60,000) = n/a + n/a + n/a n/a - n/a = n/a 60,000 OA Assets Stockholders' Equity Cash Flow
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Event 4:  The instructor earned a salary of $16,000.   No cash has yet been paid to the employee. 1. Increase liabilities 
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Chapter 2 - Chapter Two Accrual Acctg! Accounting for...

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