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Chapter 4

ACC100 - Chapter 4, 5, 6

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ACC 100
Else Grech

ACC100 – Midterm #2 Notes Chapter 4 • Recognition o Formally recording an item in the financial statements of an entity o Economic Events are recognized and measured • Measurement o Quantification of the effects of the item on the entity • Cash-basis accounting o Records revenue when cash is received (cheques, credit card, or cash) o Records expenses when cash is paid (usually by cheque in a business) • Accrual-basis accounting o Records revenue when earned o Records expenses when incurred, used, or consumed to generate revenue o Under accrual accounting we record the economic activity that the company is engaged in • External users need two things: o 1. Understanding of all economic transactions (accrual accounting) o 2. To know how a company manages their cash (cash accounting) • Cash vs. Accrual Basis o The 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  Means that life of a company can be divided into arbitrary time periods o A 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! o When a transaction straddles different time periods we have to decide in which period will we record the transaction o When 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: o Prepaid expense o Unearned revenue o All recognize revenue or expense before or after cash is exchanged • Summary of unearned revenue adjusting entries: o Always have an initial entry o Always have an unearned revenue balance already on the T/B at year end o Need to recognize the revenue we have earned o Always involves a: decrease to the liability account and an increase to the revenue o NEVER involves cash • Summary of prepaid adjusting entries: o Always have an initial entry o Always have a balance already on the T/B at year end o Need to expense the amount we consumed or used up o Always involves a: decrease to an asset and an increase to an expense o NEVER involves cash • Accrued liability – expense incurred before cash is paid o ALWAYS result from NEW information available at year end o Record expense (and corresponding liability) in period incurred; pay for it in a future period o No cash flow on recordings, only when paid o Examples  Wages  Interest  Taxes • Summary of accrued liability o NEVER has an initial entry o NEVER has a balance on the T/B o Need to record the expense because we have used up, consumed or incurred an expense to help us generate revenue. o Always involves a: increase to the liability account and an increase to the expense account. o NEVER involves cash! o Always involves a subsequent cash payment. • Accrued asset – revenue earned before cash is received o Record revenue (and corresponding receivable) in period earned; receive payment in a future period o Examples  Sell a product  Pro
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