MGT120H5 Chapter Notes - Chapter 3: Income Statement, Trial Balance, Retained Earnings
CHAPTER 3: ACCURAL ACCOUNTING
Summary:
• accrual accounting A basis of accounting that records transactions
based on whether a business has acquired an asset, earned revenue,
taken on a liability, or incurred an expense, regardless of whether
cash is involved.
• unearned revenue A liability that arises when a business receives
cash from a customer prior to providing the related goods or
services.
• current ratio Current assets divided by current liabilities.
Measures a company’s ability to pay current liabilities with current
assets.
• debt ratio Ratio of total liabilities to total assets. States the
proportion of a company’s assets that is financed with debt
• When using the cash basis of accounting, we record only business
transactions involving the receipt or payment of cash. All other
business transactions are ignored
• in contrast, when using accrual accounting, the receipt or payment
of cash is irrelevant to deciding whether a business transaction
should be recorded. What matters is whether the business has
acquired an asset, earned revenue, taken on a liability, or incurred
an expense. If it has, the transaction is recorded in the accounting
records
• According to the revenue recognition principle, a transaction must
satisfy all three of these conditions before the business can
recognize revenue
• The ownership (or control) and benefits of the goods have been
transferred to the customer, or the services have been provided to
the customer.
• The amount of revenue can be reliably measured.
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MGT120H5 Full Course Notes
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Document Summary
Measures a company"s ability to pay current liabilities with current assets: debt ratio ratio of total liabilities to total assets. States the proportion of a company"s assets that is financed with debt: when using the cash basis of accounting, we record only business transactions involving the receipt or payment of cash. All other business transactions are ignored: in contrast, when using accrual accounting, the receipt or payment of cash is irrelevant to deciding whether a business transaction should be recorded. What matters is whether the business has acquired an asset, earned revenue, taken on a liability, or incurred an expense. Deferrals include adjustments related to transactions for which a business has received or paid cash in advance of delivering or receiving goods and services. Depreciation adjustments are made to expense the benefits of capital assets that have been used up during the period.
