COMMERCE 1AA3 Lecture Notes - Lecture 7: Accrual, Deferred Income, Deferral
7 Oct 2016
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Document Summary
Cash basis violates the revenue recognition principle. Revenue recognition principle: service has been performed/goods have been transferred, amount is known, risk and reward has been transferred, collection is reasonably assured. Matching principle: must record expense in the period in which it has been incurred/use, to generate revenues. 2 - quadrants 2 and 3 make up adjustments for chp. As long as service coincides with cash, the first quadrant applies. (top portion for provider, lower portion for receiver) When cash has exchanged hands, but service has not performed, the second quadrant applies. When payment has been received but service not provided, for the receiver, it is a liability and the account name is unearned revenue (unearned rent revenue, unearned insurance revenue, etc. ), for the receiver we call it deferred revenue or simply deferral. Provide a service, there is a revenue, a/r (right side) and service revenue (left side) = accrual.
