ACC 131 Seipp Week 4 Lecture Notes: 9/8-9/11
ACC 131 Seipp Week 4 Lecture Notes: 9/8-9/11 ACC 131
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This 4 page Class Notes was uploaded by Daniel Hemenway on Sunday September 13, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 50 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 09/13/15
ACC 131 Seipp 98911 Chapter 3 Accrual Accounting Completing the Accounting Cycle This requires preparation of Adjusting journal entries financial statements from the Adjusted accounts and closing the accounts in order to prepare for the next accounting period Accrual vs Cash Basis of Accounting CashBasis Accounting Revenue is recorded when cash is received regardless of when it is actually earned AccrualBasis Accounting also called accrual accounting Is an alternative to cashbasis accounting that is required by GAAP Under accrual accounting transactions are recorded when they occur Accrual accounting is superior to cashbasis because it links income measurement to selling the principle activity of the company Time Period Assumption TimePeriod Assumption Allows companies to artificially divide their operations into time periods so they can satisfy users demands for information Companies frequently engage in continuing activities that affect more than one time period Accrual accounting requires companies to assign revenues and expenses to the proper time period This is often a difficult task and is guided by the Revenue Recognition and Matching Principles The Revenue Recognition Principle The Revenue Recognition Principle Determines when revenue is recorded and reported Under this principle revenue is recognized or recorded in the period in which both of the following conditions are met The revenue has been earned The collection of cash is reasonably assured Revenue is recorded when these two conditions are met regardless of when cash is received ACC 131 Seipp 98911 The Expense Recognition or Matching Principle Expense Recognition or Matching Principle The process of identifying an expense with a particular time period The key idea is that an expense is recorded when it is incurred regardless of when cash is paid Under accrual accounting expenses are recognized following the expense recognition matching principle which requires that expenses be recorded and reported in the same period as the revenue Expenses for an accounting period should include only those costs used to earn revenue that was recognized in the accounting period The key to expense recognition is matching the expense with revenue Accrual Accounting and Adjusting Entries Adjusting Entries Journal entries made at the end of an accounting period to record the completed portion of partially completed transaction Only done when preparing to do financial statements Adjusting entries are necessary to apple the revenue recognition and matching principles and ensure that a company s financial statements include the proper amount for revenues expenses assets liabilities and stockholders equity Step 5 Adjusting the Accounts Adjustments are often necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid The purpose of all Adjustments is to make sure revenues and expenses get recorded in the proper time period All Adjusting entries will affect at least one income statement account and one balance sheet account Note that cash is never affected by Adjustments Types of Adjusting Entries Two different categories Accruals Happened but not yet recorded Deferrals Have paid for or have been paid but not yet recorded ACC 131 Seipp 98911 Three StepProcess for Making Adjusting Entries 1 Identify what the accounts are income statement and balance sheet accounts that require Adjustments 2 Calculate the amount of the Adjustments based on the amount of revenue that was earned or the amount of expense that was incurred during the accounting period 3 Record the Adjustmentjournal entry Accrued Revenues Companies often engage in revenueproducing activities but are not paid until after the activities are complete Accrued Revenues Transactions where a company has earned revenue but not received the cash Example Interest Earned but not yet received on a loan Accrued Expenses Accrued Expenses Previously unrecorded expenses that have been incurred but not yet paid in cash Many companies incur expenses in the current accounting period but do not pay cash for these expenses until a later period Deferred Unearned Revenues Deferred Unearned Revenues Transactions for which a company has received cash but has not yet earned the revenue Examples Rent received in advance magazine or newspaper subscriptions received in advance and tickets airlines sporting events concerts sold in advance In all of the example situations the receipt of cash creates a liability for the company to deliver goods or perform services in the future The unearned revenue account delays or defers the recognition of revenue by recording the revenue as a liability until it is earned Deferred Prepaid Expenses Companies often acquire goods and service before they are used Theses prepayments are recorded as assets called Deferred or Prepaid Expenses The deferral of the expense is necessary because the initial cash payment did not result in an expense but an asset that results in future benefits ACC 131 Seipp 98911 Depreciation Depreciation Because property plant and equipment longlived assets help to produce revenue over a number of years instead ofjust one period the matching principle requires companies to systematically assign or allocate the cost of these assets as expense to each period in which they are used The depreciation process requires an Adjustment to recognize the expense incurred during the period and reduce the longlived asset The unused portion of a longlived asset is reported on the balance sheet Contra Accounts Accountants normally use a contra account to reduce the amount of a long lived asset Contra Accounts Accounts that have a balance that is opposite of the balance in the related account Example Accumulated Depreciation account Therefore while an asset has a normal debit balance a contra asset account has a normal credit balance Contra asset account balance is deducted from the balance of the related asset account in the financial statement balance sheet and the resulting difference is known as the book value of the asset There is no Contra Dividend Account
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