: ACC-211 CH 4 Notes
Document Summary
Revenue recognition results from a five-step process: the expense recognition principle requires that efforts (expenses) be matched with accomplishments (revenues), the critical issue is determining when the expense makes its contribution to revenue. Expenses are recognized (recorded) only when cash is paid: accrual basis accounting requires accountants to adhere to the revenue recognition principle and the expense recognition principle. Cash basis accounting does not satisfy the requirements of generally accepted. Adjusting entries can be classified as either deferrals or accruals. Each of these classes has two subcategories: deferrals can be prepaid expenses or unearned revenues, accruals are either accrued revenues or accrued expenses. An adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account. Inflate revenue numbers in the short-run (to the detriment of the long-run).
