BSB110 Lecture Notes - Lecture 5: Conceptual Framework, Accrual, Retained Earnings
Week 5 Accounting Lecture Notes
Accrual Accounting Concepts
Accrual versus Cash Basis of Accounting
• Accrual-based Accounting:
o Revenue recognised when goods and services are provided
o Expenses recognised when assets are consumed or liabilities incurred
• Cash-based Accounting:
o Revenue recognised when the cash is received
o Expenses recognised when the cash is paid
Revenue Recognition Criteria
• Accounting divides the economic life of a business into artificial time periods (period
assumption).
• At what point of the operating cycle should revenue be recognised?
• Conceptual Framework provides guidance:
• Revenue should be recognised when and only when:
a. It is probable that any future economic benefits associated with the revenue will
flow to the entity; and
b. The revenue can be measured with reliability
Expense Recognition Criteria
• Expenses are decreases in economic benefits (decreases in equity which are not due
to distributions to the owner(s)).
• Conceptual framework provides guidance:
• Expenses should be recognised when and only when:
a. The outflow of future economic benefits associated with the expense is
probable; and,
b. The expense can be measured reliably
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Relationships
The Trial Balance
The Basics of Adjusting Entries
• Adjusting entries are necessary each time financial statements are prepared to make
sure:
o Revenues and expenses are recorded in the correct accounting period
(accounting period concept)
o Recognition criteria are followed for assets, liabilities, revenues and expenses
(conceptual framework criteria)
• Adjusting entries affect both:
o A Statement of Financial Position account (either an asset or liability) and,
o A Statement of Profit or Loss account (either a revenue or expense).
• Adjusting entries never involve cash.
WONG PTY LTD
Trial Balance
as at 31 October 2016
No. Account title Debit Credit
100 Cash 15 200
110 Advertising Supplies 2 500
112 Prepaid Advertising 600
130 Office Equipment 5 000
200 Accounts Payable 2 500
213 Revenue Received in Advance 1 200
230 Bank Loan 5 000
300 Share Capital 10 000
320 Dividends 500
400 Service Revenue 10 000
500 Salaries Expense 4 000
510 Rent Expense 900
28 700 28 700
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Types of Adjusting Entries
• Prepayments:
1. Prepaid Expenses:
o Amounts paid in cash and recorded as assets until used up or consumed.
o Asset accounts until expensed when used.
2. Revenue Received in Advance:
o Amounts received in cash from customers and recorded as a liability until
services/work performed or goods delivered.
o Liability accounts until revenue is earned.
• Accruals:
1. Accrued Revenues:
o Amounts not yet received or recorded, for which goods or services have been
provided.
o Asset accounts until the cash is received.
o Revenue is recognised at adjusting time.
2. Accrued Expenses:
o Amounts not yet paid or recorded, for goods or services already received.
o Liability accounts until the cash is paid.
o Expense is recognised at adjusting time.
Adjusting Entries for Prepayments
• Prepayments are either:
1. Prepaid Expenses
o Assets
2. Revenues Received In Advance
o Liabilities
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