Chapter3 Accounting-1 - I Timing and Reporting of Revenue and Expense A 1 The Accounting Period Time-period Principle Ensures that accounting

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

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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 .

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