CACC 100 CH04

CACC 100 CH04 - CACC100 CH04 TIMING ISSUES Accounting...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CACC100 CH04 TIMING ISSUES Accounting divides the economic life of a business into artificial time periods. (As indicated in ch02, this is the time period assumption). Accounting time periods are usually 1 month, one quarter, or one year. Many accounting transactions affect more than one of these arbitrary time periods Ex: A new building purchased by Loblaw will be used for many years, so it does not make sense to expense the full cost of the building at the time of purchase. Therefore, it is necessary to determine the impact of each transaction on specific accounting periods (Actual revenue and expense for each accounting period). This can be determined using two generally accepted principles: 1. Revenue Recognition Principle Revenue must be recognized in the accounting period in which it is earned Revenue is recognized when the sales effort is substantially complete and collection reasonably assured 2. Matching Principle o It is the principle for recognizing expense. It states that: Efforts (expenses) must be matched with accomplishments (revenues) Ex: Cost of goods sold can be directly matched to sales revenue in the period in which the sales occurred o Expense recognition is tied to revenue recognition Ex: Salary expense of performing the cleaning service on June 30 should be reported in the same period in which the service revenue is recognized THE COMBINED APPLICATION OF THE REVENUE RECOGNITION PRINCIPLE AND MATCHING PRINCIPLE RESULTS IN ACCRUAL BASIS ACCOUNTING ACCRUAL VERSUS CASH BASIS OF ACCOUNTING Accrual basis accounting means that transactions that affect a companys financial statements are recorded in the periods in which the event. This result in matching revenues that have been earned with the expenses incurred to earn these same revenues Cash basis accounting means that revenue is recorded only when cash is received, and an expense is recorded only when cash is paid THE BASICS OF ADJUSTING ENTRIES For revenues to be recorded in the period in which they are earned, and for expenses to be matched with revenue they generate, adjusting entries are made to adjust accounts at the end of the accounting period. Types of Adjusting Entries: (1) Prepayments 2 Types: Prepaid Expenses CACC100 CH04 o Expenses paid in cash and recorded as assets before they are used or consumed o The following are common : * pre-paid expenses: {insurance, supplies, rent} * long-term prepaid expenses: {buildings, equipment} Unearned Revenues o Cash received and recorded and liabilities before revenue is earned (2) Accruals It is required in order to record revenues earned or expenses incurred, in the current accounting period Before Accrual adjustments: o Revenue account and the related asset account are understated o Expense account and the related liability account are understated 2 Types: Accrued Expenses o Expenses incurred but not yet paid in cash or recorded Accrued Revenues Revenues earned but not yet received in cash or recorded...
View Full Document

Page1 / 9

CACC 100 CH04 - CACC100 CH04 TIMING ISSUES Accounting...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online