ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4 Explain the revenue rec

ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4 Explain the revenue rec www.phwiki.com

ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4 Explain the revenue rec

Ramirez, Jacobo, Host has reference to this Academic Journal, PHwiki organized this Journal ACCRUAL ACCOUNTING CONCEPTS Accounting, Fourth Edition 4 Explain the revenue recognition principle in addition to the expense recognition principle. Differentiate between the cash basis in addition to the accrual basis of accounting. Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries. Prepare adjusting entries as long as deferrals. Prepare adjusting entries as long as accruals. Describe the nature in addition to purpose of the adjusted trial balance. Explain the purpose of closing entries. Describe the required steps in the accounting cycle. Underst in addition to the causes of differences between net income in addition to cash provided by operating activities. Study Objectives

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Types of adjusting entries Adjusting entries as long as deferrals Adjusting entries as long as accruals Summary of basic relationships Timing Issues The Basics of Adjusting Entries The Adjusted Trial Balance in addition to Financial Statements Closing the Books Quality of Earnings Revenue recognition principle Expense recognition principle Accrual versus cash basis of accounting Preparing the adjusted trial balance Preparing financial statements Preparing closing entries Preparing a post-closing trial balance Summary of the accounting cycle Earnings management Sarbanes-Oxley Accrual Accounting Concepts Generally a month, a quarter, or a year. Fiscal year vs. calendar year Accountants divide the economic life of a business into artificial time periods (Periodicity Assumption). SO 1 Explain the revenue recognition principle in addition to the expense recognition principle. Jan. Feb. Mar. Apr. Dec Timing Issues What is the periodicity assumption a. Companies should recognize revenue in the accounting period in which it is earned. b. Companies should match expenses with revenues. c. The economic life of a business can be divided into artificial time periods. d. The fiscal year should correspond with the calendar year. Review Question Timing Issues SO 1 Explain the revenue recognition principle in addition to the expense recognition principle.

Timing Issues The Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is per as long as med. SO 1 Explain the revenue recognition principle in addition to the expense recognition principle. Timing Issues Illustration: Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim in addition to pay as long as their clothes until the first week of July. The journal entries as long as June in addition to July would be: SO 1 Explain the revenue recognition principle in addition to the expense recognition principle. Timing Issues “Let the expenses follow the revenues.” SO 1 Explain the revenue recognition principle in addition to the expense recognition principle. Illustration 4-1 (Partial)

Timing Issues SO 1 Explain the revenue recognition principle in addition to the expense recognition principle. Illustration 4-1 GAAP relationships in revenue in addition to expense recognition Discussion on notes page. Accrual-Basis Accounting Transactions recorded in the periods in which the events occur. Revenues are recognized when earned, even if cash was not received. Expenses are recognized when incurred, even if cash was not paid. Timing Issues Accrual versus Cash Basis of Accounting SO 2 Differentiate between the cash basis in addition to the accrual basis of accounting.

Cash-Basis Accounting Revenues are recognized only when cash is received. Expenses are recognized only when cash is paid. Prohibited under generally accepted accounting principles (GAAP). Timing Issues SO 2 Differentiate between the cash basis in addition to the accrual basis of accounting. Accrual versus Cash Basis of Accounting Timing Issues Illustration: Suppose that Fresh Colors paints a large building in 2011. In 2011, it incurs in addition to pays total expenses (salaries in addition to paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2012. Illustration 4-2 (Partial) SO 2 Differentiate between the cash basis in addition to the accrual basis of accounting. Which one of these statements about the accrual basis of accounting is false Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. Companies recognize revenue in the period in which it is earned. This basis is in accord with generally accepted accounting principles. Companies record revenue only when they receive cash, in addition to record expense only when they pay out cash. Review Question Timing Issues SO 2 Differentiate between the cash basis in addition to the accrual basis of accounting.

Adjusting entries make it possible to report correct amounts on the balance sheet in addition to on the income statement. A company must make adjusting entries every time it prepares financial statements. Includes one income statement account in addition to one balance sheet account. The Basics of Adjusting Entries SO 3 Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries Revenues – recorded in the period in which they are earned. Expenses – recognized in the period in which they are incurred. Adjusting entries – needed to ensure that the revenue recognition in addition to expense recognition principles are followed. The Basics of Adjusting Entries SO 3 Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries

Adjusting entries are made to ensure that: a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet in addition to income statement accounts have correct balances at the end of an accounting period. d. All of the above. Review Question The Basics of Adjusting Entries SO 3 Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries Types of Adjusting Entries Illustration 4-3 Categories of adjusting entries SO 3 Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries Deferrals: 1. Prepaid expenses: Expenses paid in cash in addition to recorded as assets be as long as e they are used or consumed. 2. Unearned revenues: Cash received in addition to reported as liabilities be as long as e revenue is earned. Accruals: 1. Accrued revenues: Revenues earned but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. Trial Balance – Each account is analyzed to determine whether it is complete in addition to up-to-date. Types of Adjusting Entries SO 3 Explain why adjusting entries are needed, in addition to identify the major types of adjusting entries Illustration 4-4

Deferrals are either: Prepaid expenses OR Unearned revenues. Adjusting Entries as long as Deferrals SO 4 Prepare adjusting entries as long as deferrals. Payment of cash, that is recorded as an asset because service or benefit will be received in the future. Adjusting Entries as long as “Prepaid Expenses” insurance supplies advertising Cash Payment Expense Recorded BEFORE rent equipment buildings Prepayments often occur in regard to: SO 4 Prepare adjusting entries as long as deferrals. Prepaid Expenses Costs that expire either with the passage of time or through use. Adjusting entry results in an increase (a debit) to an expense account in addition to a decrease (a credit) to an asset account. Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals.

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Adjusting Entries as long as “Prepaid Expenses” Adjusting entries as long as prepaid expenses Increases (debits) an expense account in addition to Decreases (credits) an asset account. SO 4 Prepare adjusting entries as long as deferrals. Illustration 4-5 Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on h in addition to . Supplies 1,500 Supplies Expense 1,500 Oct. 31 Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals. Illustration 4-6 (Partial) ($2,500 – 1,000 = $1,500) Illustration: On October, 4 Sierra Corporation paid $600 as long as a one-year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month. Prepaid Insurance 50 Insurance Expense 50 Oct. 31 Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals. Illustration 4-7 (Partial)

Depreciation Buildings, equipment, in addition to motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired. Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life. Depreciation does not attempt to report the actual change in the value of the asset. Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals. Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month. Accumulated Depreciation-Equipment 40 Depreciation Expense 40 Oct. 31 Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals. Illustration 4-8 (Partial) Statement Presentation Accumulated Depreciation-Equipment is a contra asset account. Appears just after the account it offsets (Equipment) on the balance sheet. Adjusting Entries as long as “Prepaid Expenses” SO 4 Prepare adjusting entries as long as deferrals. Illustration 4-9

5. Total Columns, Compute Net Income (Loss) Compute Net Income or Net Loss. SO 10 (d) (g) (a) (b) (c) (f) (e) (a) (b) (d) (e) (c) (f) (g) “Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request as long as further in as long as mation should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies as long as his/her own use only in addition to not as long as distribution or resale. The Publisher assumes no responsibility as long as errors, omissions, or damages, caused by the use of these programs or from the use of the in as long as mation contained herein.” Copyright

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