ECO 1102 Lecture Notes - Lecture 4: Deferral, Accrual, Revenue Recognition

• School: University of Ottawa
• Department: Economics
• Course: ECO 1102
• Professor: Octavian Strimbu

Document Summary

Explain when revenues and expenses are recognized. Prepare adjusting entries for prepayments and accruals. Prepare closing entries and a post-closing trial balance. Cash basis accounting: events are recognized in the period that cash is paid or received. Revenue is recorded only when cash is received. Expenses are recorded only when cash is paid. Accruals basis accounting: transactions are recorded in the periods in which the events occur. Revenue is recorded when earned, rather than when cash is received. Expenses are recorded when goods or services are consumed or used, rather than when. Cash basis accounting can lead to misleading information for decision-making: revenue and expenses can be manipulated by timing the receipt and payment of cash is paid cash. Accrual basis of accounting is central to all accounting standards: revenue is recorded when earned, expenses are recorded when goods or services are consumed or used, need some standards that define when we should recognize revenues and expenses.