Textbook Notes (362,755)
Canada (158,052)
MGAB01H3 (126)
G.Quan Fun (21)
Chapter 4

Chapter 4 notes

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

Chapter 4 Accrual Accounting Concepts Notes Timing Issues N many accounting transactions affect more than one arbitrary time period N determining the amount of revenue and expenses to report in a particular accounting period an be difficult Revenue Recognition Principle N revenue recognition principle : principle that states that revenue must be recognized in accounting period in which it is earned N revenue recognition is governed by guidelines, which sometimes require a significant amount of professional judgment to apply N in general, though, revenue is recognized when the sales or performance effort is substantially complete, the amount is determinable (measurable), and collection is reasonably assured Matching Principle N matching principle : principle of expense recognition that states that efforts (expenses) must be matched with accomplishments (revenues), whenever possible N some expenses are easy to match with revenues; others are more difficult to directly associate with revenue Accrual versus Cash Basis of Accounting N accrual basis accounting : an accounting basis in which transactions that change a companys financial statements are recorded in the periods in which the events occur, rather than in the period in which the company receives or pays cash N cash basis accounting : an accounting basis in which revenue is recorded only when cash is received, and an expense is recorded only when cash is paid N the cash basis accounting violates the revenue recognition principle and matching principle The Basics of Adjusting Entries N adjusting entries : journal entries made at the end of an accounting period because of the time period assumption and to ensure that the revenue recognition and matching principles are followed N adjusting entries are necessary because the trial balance may not contain complete and up-to-date data, which is true for reasons: 1. some events are not recorded daily, because it would not be useful or efficient to do so 2. some costs are not recorded during the accounting period, because these costs expire with the passage of time rather than as a result of recurring daily transactions 3. some items may be unrecorded Types of Adjusting Entries N entries can be classified as prepayments (prepaid expenses and unearn
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