ACCG101 Lecture Notes - Lecture 5: Deferral, Accrual, Accounts Receivable

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limehound700

30 May 2018

School

Macquarie University

Department

Accounting and Corporate Governance

Course

ACCG101

Professor

All

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Week 5 Adjusting Entries

Accrual Accounting Concepts

Cash Based Accounting

- Revenue is recorded only when the cash is received, and an expense is

recorded only when cash is paid

- When the majority of the transactions are carried out using cash, the cash

basis will produce similar results to the accrual basis and is similar to operate

- However, it is not suitable where business organisations conduct a major part

of their business on credit, because the statement of profit or loss produced

under cash accounting would not represent the activities that relate to the

current period

Accrual Based Accounting

- Records goods sold rather than cash received

- Records transactions and events in the accounting periods in which they

occur than in the periods in which the entity receives or pays the related cash

- Statement of profit or loss and statement of financial position should be

prepared on an accrual basis in order to best serve the function of providing

relevant and reliable information for making decisions

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Revenue Recognition Criteria

Revenues should only be recognised when:

a) It is probable that any future economic benefits associated with the revenue

will flow to the entity

b) The revenue can be measured with reliability

Accounting Standard for Revenue Recognition

Step 1) Identify the contracts with a customer

- Must be approved by both parties and each party’s rights with the regards to

the goods and services to be transferred must be clearly identified.

- Must have commercial substance and it is probable that the consideration will

be collected

Step 2) Identify the performance obligation in the contract

- It can either be a distinct good or service that are delivered and have a pattern

of transfer over time

Step 3) Determine the transaction price

- This is the transfer price the entity expects to receive based on past

experience with the customer, net of discounts, rebates or refunds

Step 4) Allocate the transaction price to the performance obligation in the contract

Step 5) Recognise revenue when or as the entity satisfies a performance obligation

- The following conditions above have been met

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Document Summary

Revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid. When the majority of the transactions are carried out using cash, the cash basis will produce similar results to the accrual basis and is similar to operate. Records goods sold rather than cash received. Records transactions and events in the accounting periods in which they occur than in the periods in which the entity receives or pays the related cash. Statement of profit or loss and statement of financial position should be prepared on an accrual basis in order to best serve the function of providing relevant and reliable information for making decisions. Revenues should only be recognised when: it is probable that any future economic benefits associated with the revenue will flow to the entity, the revenue can be measured with reliability. Step 1) identify the contracts with a customer.

Related Questions

Which of the following statements is true of accrual basis accounting?

a. Accrual basis accounting records revenue only when cash is received.

b. Accrual basis accounting is required by GAAP.

c. Accrual basis accounting always results in greater net income than cash basis accounting.

d. Accrual basis accounting records expenses only when cash has been paid to them.

blushcamel925

1. Undercash-basis accounting, when is revenue recorded? When is itrecorded under accrual-basis accounting?

2. Under accrualaccounting, when is revenue considered earned?

3. If amembership represents an advance payment for services provided,when is it recognized as revenue under the accrual basis, and whatis it called?

4. Why isinsurance expense spread over multiple periods even though thepolicy coverage is paid in advance?

5. At the end ofthe month for Silverâs Gym, what entries need to be made under thecash basis of accounting for wages that have not yet been paid?What entries need to be made under the accrual method?

6. Why is itimportant to match expenses and revenues to reflect the performanceof a business over a particular time period?

7. When mightthe use of cash basis accounting overstate the actual profitsearned by Silverâs gym? When might it understate the actual profitsearned?

8. Which basisof accounting is in accordance with GAAP for large companies?

puceeagle823

(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)âHough Consulting had the following selected transactions in July:

July 1 Prepaid insurance for July through September, $4,200.

2 Purchased office furniture for cash, $5,000.

3 Performed consulting services for a client on account, $3,500.

5 Paid advertising expense, $500.

10 Performed consulting services and received cash, $1,500.

20 Purchased a computer on account, $2,500.

25 Collected for July 3 service.

26 Paid account payable from July 20.

29 Paid salary expense, $1,800.

31 Adjusted for July insurance expense (see July 1).

31 Earned revenue of $1,000 that was collected in advance back in June.

31 Recorded July depreciation on fixed assets, $125.

LO USING EXCEL:

1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.

2. Compute July income (loss) before tax under each accounting method

3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 3 and July 25 to explain.

Req. 1 & 2
Hough Consulting
Amount of Revenue (Expense) for July
Date		Cash Basis	Accrual Basis
July 1












	Income (loss) before tax	$ -	$ 0

Req. 3

greyplatypus825

ACCG101 Lecture Notes - Lecture 5: Deferral, Accrual, Accounts Receivable

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