BSB110 Lecture Notes - Lecture 5: Trial Balance, Retained Earnings, Deferral
Accounting – Accrual Accounting Concepts
Accrual Accounting
- About the timing of cash
- Accrual vs. Cash
- Accrual
oRevenue recognised when goods and services are provided
oExpenses recognised when assets are consumed or liabilities incurred
oAs long as it has occurred, it is recorded (presence of cash is not important)
- Cash
oRevenue and expenses recognised when the cash is received/paid
oNot suitable when business organisations conduct a major part of the business on
credit
Revenue Recognition Criteria
- Life of business is divided into periods
- Operating cycle – length of time it takes for a business to acquire goods, sell them to
customers, and collect the cash from the sale
- At what point of the operating cycle should revenue be recognised?
- Conceptual framework
oRevenue should be recognised when future economic benefits will flow to the entity
and the revenue can be measured with reliability
oIs it certain there will be economic benefit? How much?
Expense Recognition Criteria
- Expenses are decreases in economic benefits
- Encompassing both losses and expenses
- Include expenses that arise in the ordinary activities of the entity e.g. cost of sales, wages,
payment for rent etc.
- Losses – expenses that do not necessarily arise in the ordinary course of business e.g. loss
from fire/flood, reductions in economic benefits that are reported on a net basis (loss on
sale of non-current assets)
- Conceptual framework
oExpenses should be recognised when the outflow of future economic benefits
associated with the expense is probable and the expense can be measured reliably
Adjusting Entries
- Done to make sure revenue and expenses are recorded in the correct accounting period
- Recognition criteria are followed for assets, liabilities, revenues, and expenses
- Done to keep things up to date
- Affect financial position and profit and loss statements
- NEVER INVOLVE CASH
- Internal adjustments
- Done on the last day of the financial period
- Two types
oPrepayments
Prepaid expenses
When cash was paid before service
Asset account
Unearned revenue
When cash was received before the service
Liability account
oAccruals
Accrued revenue
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