ACCT 2220 Chapter Notes - Chapter 4: Matching Principle, Accrual, Financial Statement

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11 Nov 2013
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Divides the economic life of a business into artificial time periods. Ex: interim period (month, quarter) or year (fiscal, calendar) Dictates that revenue be recognized in the accounting period in which it is earned. Merchandising company: revenue is earned when the merchandise is sold (normally at point of sale) Service company: revenue is considered earned at the time the service is performed. Requires that expenses be recorded in the same time period in which the revenues they helped produce are recorded. The practice of expense recognition is referred to as the matching principle. Revenue is recorded only when cash is received. Expenses are recorded only when cash is paid. Not in accordance with gaap: violates revenue recognition and matching principle. Means transactions that affect a company"s financial statements are recorded in the periods in which the events occur, rather than when the company actually receives or pays cash. Revenue is recorded when earned, rather than when cash is received.

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