Accounting Chapter 4
Recognition is the process of including an item in the financial statement of an entity.
The measurement of the financial effects of the even on the company. Measurement of an
Item in financial statements requires that two choices be made. First the accountant must
decide on the attribute to be measured. Second, a scale of measurement or unit of
measure must be chosen.
Attribute to Be Measured
Historical cost: The amount paid for an asset and used as a basis for recognizing it on the
balance sheet and carrying it on later balance sheets, recognizing it as its original cost. This
approach is simple and verifiable.
Realizable Value: An alternative to historical cost as the attribute to be measured is realizable
value. Realizable value is the amount of cash, or its equivalent, that could be received by selling
an asset currently.
Unit of Measure
The unit of measure is the yardstick or unit of measure. The yardstick we currently use is units of
Accrual and Cash Basis of Accounting
Accrual Basis: A system of accounting in which revenues are recognized when earned and
expenses when incurred.
Cash Basis: A system of accounting in which revenues are recognized when cash is received and
expenses when cash is paid.
Adjusting entries are the journal entries the accountant makes at the end of a period for a
company on the accrual basis of accounting.
Types of Adjusting Entries (There are 4 types)
1) Prepaid Expense “deferred expense” (Cash paid before expense is Incurred)
An asset resulting from the payment of cash before the incurrence of expense.
Entry During Period: Asset, Cash
Entry At End of Period: Expense, Asset
Examples: Insurance Policy, Supplies, Rent, Buildings, Equipment Depreciation: The process of allocating the cost of a long term tangible asset over its useful
Straightline method: The assignment of an equal amount of depreciation to each period