MGMT 120A Lecture Notes - Lecture 1: Going Concern, Unobservable, Historical Cost
Document Summary
Cash basis accounting: rev is recognized when cash is received, expenses are recognized when cash is paid, cash flows in any one year may not be a predictor of future cash flows, example: A company has sales on accounting totaling 100k per year and collected as shown below. Company prepaid 60k for 3 years of rent in the first year. Utilities are 10k per year but only 5k was paid in the first year. Payments to employees are 50k per year. This example shows that cash flows in any one year may not be a good predictor of future cash flows. Accrual basis accounting: rev recognized when earned, expenses recognized when incurred, same example as before but on accrual basis: Cr a/r: we can combine this into: Dr a/r 110 [net change in a/r over the year] Cr sales 1,400: cash is a plug as either a debit or credit.
