MGT120H5 Chapter Notes - Chapter 3: Deferral, Accrual, Accounts Payable
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MGT120H5 Full Course Notes
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Accrual basis - records the impact of a business transaction as it occurs. You record the transaction even though you didn"t receive cash. Cash basis - records only cash transactions - cash receipts and cash payments. Cash receipts are treated as revenues and cash payments are handled as expenses. Cash basis isn"t used because it has a defect of ignoring important information. Like, when you have a sale on account. Your balance sheet and income statement is understated. Accrual basis is based on the time-period concept, the revenue principle, and guidelines for recording expenses. Time period concept: ensures that accounting information is reported at regular intervals. The revenue principle: this governs when to record revenue (make a journal entry), and the amount of revenue to record. Revenue should be recorded when it is earned and not before. Revenue is earned when the business has delivered a good/service to a customer.