Chapter 4 - Study Objectives Chapter 4 1 2 3 4 5 Accrual...

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8/15/2011 1 Accrual Accounting Concepts Chapter 4 Study Objectives 1. Revenue Recognition/Matching Principle 2. Adjusting Entries: prepayments 3. Adjusting Entries: accruals 4. Adjusted Trial Balance 5. Closing entries and post-closing trial Chapter 4 3 Time Period Assumption Divides the economic life of a business into artificial time periods – Interim period (month, quarter) – Year (fiscal, calendar) Chapter 4 4 Revenue Recognition Principle Dictates that revenue be recognized in the accounting period in which it is earned Revenue Recognition Principle Merchandising company – Revenue is earned when the merchandise is sold (normally at the point of sale) Service company – Revenue is considered earned at the time the service is performed Chapter 4 5 Chapter 4 6 Matching Principle Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded
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8/15/2011 2 Chapter 4 7 Cash Basis of Accounting Revenue is recorded only when cash is received Expenses are recorded only when cash is paid Not in accordance with GAAP – Violates revenue recognition and matching principles Accrual Basis Accounting Revenue is recorded when
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