I.Timing and Reporting of Revenueand ExpenseA.TheAccounting Period1)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 revenuesand expensesfor the accounting period have been recorded.B.Recording Revenues and Expenses1.Revenue Recognition Principle•Revenueshould be recorded when earned•Revenue is earned when the business has delivereda completed goodor serviceto the customer.2. Matching Principle
•Expensesare recorded in the same periodin which the revenuesthey helped produceare recorded•Let the expense follow the revenuesII. Cash Basis vs. Accrual BasisA. Cash Basis Accounting-•Revenueis recognizedwhen cashis receivedand expensesare recognizedwhen paid.B. Accrual Basis Accounting-•Revenueis recognizedwhen earned(revenuerecognitionprinciple) and expensesare recognizedwhen incurred(matchingprinciple). •Both cashtransactions (collections for work performed and paying salaries) and non-cashtransactions (purchase of supplies on account and providing a service on account) are recorded.
Cash Basis Accounting not =GAAPAccrual Basis Accounting =GAAPIII. Adjusting Journal Entries•Adjusting entries are needed to bring the booksup to date for transactionsthat have taken place but may not be associated with a single economic event.•They are recordedon the last dayof the artificial time period.•Ensures revenue recognitionand matchingprinciple are followedA. There are three categories of adjusting journal entries:1)Deferral – and adjustment of an assetor liabilityfor which the business paid or receivedcash in advance2)Depreciation – allocatesthe costof assets
3)Accrual – (opposite of deferral) Adjustment of an assetor liabilityfor which the business recordsan expenseor revenue before payingor receivingcash. B. Deferral Adjusting Journal Entries1. Prepaid Expenses•Require adjustment because the cashis paidin one period, but the resourceis not completely useduntil a later period.