I.
Timing and Reporting of Revenue
and Expense
A.
The
Accounting Period
1)Time-period Principle
•
Ensures that accounting information is reported at
regular intervals
(artificial time periods).
•
Because these intervals are often different from the
intervals for transactions, accounts must be
updated
(or adjusted
) to make sure that all
revenues
and expenses
for the accounting period
have been recorded
.
B.
Recording Revenues and Expenses
1.
Revenue Recognition Principle
•
Revenue
should be recorded when earned
•
Revenue is earned when the business has delivered
a completed good
or service
to the customer
.
2. Matching Principle
•
Expenses
are recorded in the same period
in
which the revenues
they helped produce
are
recorded
•
Let the expense follow the revenues
II. Cash Basis vs. Accrual Basis
A. Cash Basis Accounting
-
•
Revenue
is recognized
when cash
is received
and expenses
are recognized
when paid
.
B. Accrual Basis Accounting
-
•
Revenue
is recognized
when earned
(revenue
recognition
principle
) and expenses
are
recognized
when incurred
(matching
principle
).
•
Both cash
transactions (collections for work
performed and paying salaries) and non-cash
transactions (purchase of supplies on account
and providing a service on account) are
recorded
.
Cash Basis Accounting
not =
GAAP
Accrual Basis Accounting =
GAAP
III. Adjusting Journal Entries
•
Adjusting entries are needed to bring the
books
up to date for transactions
that
have taken place but may not be
associated with a single economic event.
•
They are recorded
on the last day
of the
artificial time period.
•
Ensures revenue recognition
and
matching
principle are followed
A. There are three categories of adjusting
journal entries:
1)
Deferral – and adjustment of an asset
or liability
for which the business paid
or received
cash in advance
2)
Depreciation – allocates
the cost
of
assets
3)
Accrual – (opposite of deferral)
Adjustment of an asset
or liability
for
which the business records
an expense
or revenue before paying
or receiving
cash.
B.
Deferral Adjusting Journal Entries
1.
Prepaid Expenses
•
Require adjustment because the cash
is paid
in one
period
, but the resource
is not completely used
until a later period
.
