ACG 2021 Lecture 4: ACG Chapter 4 Notes

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11 Feb 2017
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Chapter 4 Notes
- Timing Issues
o Accountants divide the economic life of a business into artificial time periods
(Periodicity Assumption)
Generally, a month, a quarter, or a year
Fiscal year vs. calendar year
o The Revenues Recognition Principle
Companies recognize revenue in the accounting period in which the
performance obligation is satisfied
o Accrual Versus Cash Basics 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
- The Basics of Adjusting Entries
o 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
o 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
o 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 in cash or
recorded
o Trial Balance
Each account is analyzed to determine whether it is complete and up-to-
date
- Adjusting Entries for Deferrals
o Deferrals are either:
Prepaid expenses
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