ACCT 201 Lecture Notes - Lecture 4: Deferral, Revenue Recognition, Accrual
CHAP 4 ACCRUAL ACCOUNTING CONCEPTS
▪ Explain the accrual basis of accounting & the reasons for adjusting entries
o Accountants divide the econ life of a business into artificial time periods
(Periodicity Assumption)
o Generally a month, a quarter, or a year
o Fiscal year is an accounting time period that is one year long
▪ Revenue Recognition Principle
o Companies recognize revenue in the accounting period in which the
performance obligation is satisfied
o Customer requests service – service performed – cash received
▪ Expense recognition principles
o Match expenses with revenues in the period when the company makes efforts to
generate those revenues
o let the epeses follo the eeues
o periodicity assumption – economic life of business can be divided into artificial
time periods
o expense recognition principle – Match expenses with revenues in the period
when the company makes efforts to generate those revenues
o Revenue recognition principle - revenue recognized in the accounting period in
which the performance obligation is satisfied.
o Revenue and Expense Recognition – in accordance with generally accepted
accounting principles (GAAP)
▪ Accrual versus cash basis
o Transactions recorded in the periods in which the events occur
o Revenues are recognized when services performed, even if cash was not
received
o Expenses are recognized when incurred (acquire), even if cash was not paid
o Cash-Basis Accounting
▪ Revenue are recognized only when cash is received
▪ Expenses are recognized only when cash is paid
▪ Not in accordance with generally accepted accounting principles (GAAP)
▪ The need for adjusting entries
o Adjusting Entries
▪ Ensure that the revenue recognition and expense recognition principles
are followed
▪ Are required every time a company prepares financial statements
▪ Includes one income statement account and one balance sheet account
▪ Types of Adjusting Entries
o Deferrals:
▪ Prepaid Expenses: Expenses paid in cash and recorder as assets before
they are used or consumed
▪ Unearned Revenues: cash received before services are performed
o Accruals
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