ACC 100 Chapter Notes - Chapter 4: Deferral, Accrual, Cash Flow

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Published on 14 Nov 2011
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ACC100 – Midterm #2 Notes
Chapter 4
Recognition
oFormally recording an item in the financial statements of an entity
oEconomic Events are recognized and measured
Measurement
oQuantification of the effects of the item on the entity
Cash-basis accounting
oRecords revenue when cash is received (cheques, credit card, or cash)
oRecords expenses when cash is paid (usually by cheque in a business)
Accrual-basis accounting
oRecords revenue when earned
oRecords expenses when incurred, used, or consumed to generate
revenue
oUnder accrual accounting we record the economic activity that the
company is engaged in
External users need two things:
o1. Understanding of all economic transactions (accrual accounting)
o2. To know how a company manages their cash (cash accounting)
Cash vs. Accrual Basis
oThe time period that we record the transactions in
Means that information must be provided on a timely basis to be
relevant
Means that information must be provided on time at the end of
every period
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Means that life of a company can be divided into arbitrary time
periods
oA month or a year is artificial because of the going concern assumption
that says the life of a corporation goes on forever – when we break the
life into months or years it is not as if the company actually stops one
day and starts the next!
oWhen a transaction straddles different time periods we have to decide
in which period will we record the transaction
oWhen we have an event that straddles 2 time periods, we have to
FIRST: record the original transactions (if any), and SECOND: make
adjustments at the end of the reporting period to RECOGNIZE what has
happened since that original transaction
Types of adjusting entries:
oPrepaid expense
oUnearned revenue
oAll recognize revenue or expense before or after cash is exchanged
Summary of unearned revenue adjusting entries:
oAlways have an initial entry
oAlways have an unearned revenue balance already on the T/B at year
end
oNeed to recognize the revenue we have earned
oAlways involves a: decrease to the liability account and an increase to
the revenue
oNEVER involves cash
Summary of prepaid adjusting entries:
oAlways have an initial entry
oAlways have a balance already on the T/B at year end
oNeed to expense the amount we consumed or used up
oAlways involves a: decrease to an asset and an increase to an expense
oNEVER involves cash
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