ACCT20200 Chapter Notes - Chapter 3: Deferral, Revenue Recognition, Accrual
Chapter 3: The Accounting Cycle: End of the Period
● On the last day of the period, we need to adjust and record financial entries, prepare
financial statements, and record and post closing entries
● Accrual-basis accounting: used to measure business transactions
○ All revenues in the period that goods and services are provided
○ Expenses in the period that costs are used to provide those goods and services
○ Revenue recognition principle: revenue is recorder in the period which goods and
services are provided to customers (not necessarily the period when we receive
cash)
○ Any costs used to help generate revenues are recorded as expenses in the same
period as those revenues
● Cash-basis accounting: the revenues and expenses are recorded only at the time cash is
exchanged
○ Not a part of the GAAP
● Under both accrual-basis and cash-basis analysis, all revenues are eventually recorded for
the same amount.
● Timing differences often cause account balances of assets liabilities, revenues and
expenses to not be updated during the period.
● Adjusting entries are used to record changes in assets and liabilities that have occurred
during the period but we have not yet recorded.
○ Necessary part of accrual-basis accounting
● Timing differences that create adjusting needs:
○ Prepayments: cash flows occurring before the revenues and expenses are
recognized
■ Expenses paid in advance are recognized later
■ Prepaid expenses: arise when a company pays cash or an obligation to
acquire an asset that isn’t used until a later period
● In the period of use, adjusting is needed to decrease the asset’s
balance to its unused amount and recognize an expense for the cost
of the asset used.
Document Summary
Chapter 3: the accounting cycle: end of the period. On the last day of the period, we need to adjust and record financial entries, prepare financial statements, and record and post closing entries. Accrual-basis accounting: used to measure business transactions. All revenues in the period that goods and services are provided. Expenses in the period that costs are used to provide those goods and services. Revenue recognition principle: revenue is recorder in the period which goods and services are provided to customers (not necessarily the period when we receive cash) Any costs used to help generate revenues are recorded as expenses in the same period as those revenues. Cash-basis accounting: the revenues and expenses are recorded only at the time cash is exchanged. Under both accrual-basis and cash-basis analysis, all revenues are eventually recorded for the same amount. Timing differences often cause account balances of assets liabilities, revenues and expenses to not be updated during the period.
