ACG-2021 Lecture Notes - Lecture 4: Deferral, Accrual, Fiscal Year

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26 Oct 2016
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Intro to Financial Accounting Notes 4
Timing Issues
-Accountants divide the economic life of a business into artificial time periods (Periodicity
Assumption)
-Generally a month, a quarter, or a calendar year
-Fiscal year vs. calendar year
The Revenue Recognition Principle
-Companies recognize revenue in the accounting period in which the performance obligation
is satisfied.
Expense Recognition Principle
-Match expenses with revenues in the period when the company makes efforts to generate
those revenues.
Accrual versus Cash Basis of Accounting
-Cash-Basis Accounting
-Revenues are recognized only when cash is received
-Expenses are recognized only when cash is paid.
-Prohibited under generally accepted accounting principles (GAAP).
-Accrual-Basis Accounting
-Transactions recorded in the periods in which the events occur.
-Revenues are recognized when services performed, even if cash was not received.
-Expenses are recognized when incurred, even if cash was not paid.
Adjusting entries
-ensure that the revenue recognition and expense recognition principles are followed
-are required every time a company prepares financial statements
-includes one income statement account and one balance sheet account.
-never include cash.
Types of Adjusting Entries
Deferrals
1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or
consumed.
2. Unearned revenues: Cash received before services are performed.
Accruals
1. Accrued revenues: Revenues for services performed but not yet received in cash or
recorded.
2. Accrued expenses: Expenses incurred but not yet paid cash or recorded
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