Chapter3 Accounting-1 - I. Timing and Reporting of Revenue...

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 .