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Chapter 4

ACCT NOTES - Chapter #4

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University of Guelph
ACCT 2220

Chapter 4: Accrual Accounting Concepts Time period Assumption: - Divides the economic life of a business into artificial time periods. Ex: Interim period (month, quarter) or Year (Fiscal, Calendar) Revenue Recognition Principle: - 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. Matching Principle: - 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 Cash Basis of Accounting: - Revenue is recorded only when cash is received. - Expenses are recorded only when cash is paid - Can lead to misleading financial statements – fails to record revenue that has been earned if the cash hasn’t been received and fails to match expenses with earned revenues, can give the impression that a company is not as profitable as it was for the period. - Not in accordance with GAAP: violates revenue recognition and matching principle. Accrual Basis Accounting: - 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 - Expenses are recorded when incurred, rather than when cash is paid. Adjusting Entries: - Adjusting entries are made to adjust or update accounts at the END of the accounting pe
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