Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this... Measurement: quantification of the economic effects of the item on the entity ...but at current value or historical cost? LO1
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Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this... Measurement:
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Recognition: formally recording an item in the financial statements of
an entity
Recognition and Measurement
I know I need to record this...
Measurement: quantification of the economic effects of the item on the entity
...but at current value or historical
cost?
LO1
Cash vs. Accrual Basis
Cash basis: revenues and expenses arerecorded only when cash is received or paid
Accrual basis: revenues are recognized whenearned; expenses are recognized when incurred
LO2
Cash basisstatement
Accrual basis statement
Statement ofCash Flows
Cash flows from operating activities:
$(4,000)
IncomeStatement
Net income: $ 7,000
What accounts for the difference?
Revenue Recognition Principle
Exceptions: Long-term contracts Franchises Commodities Installment sales Rent and interest
Revenue is recognized when realized and earned—usually at time of sale
Interest Payable 150($20,000 principal × 9% × 3/12 = $450 for 3 months or
$450/3 = $150 per month)
On March 1, assume a 9%, 90-day, $20,000 loan is taken out with a bank
Accrued Liability Example #2(continued)
5/30 Interest Payable 300Interest Expense 150
Notes Payable 20,000Cash 20,450
To record payment of a 9%, 90-day, $20,000 loan with interest due on May 30
Accrued Asset Revenue earned before cash is received Examples:
• Rent• Interest
Record revenue (and corresponding receivable) in period earned; receive payment in a future period
Accrued Asset Example
First day of the month:Rent Receivable 2,500
Rent Revenue 2,500Upon receipt of cash:
Cash 2,500 Rent Receivable 2,500
Rent payment of $2,500 due within first 10 days of month
Adjusting Entry SummaryExamples: Deferred Expense cash received before expense is incurred Deferred Revenue cash received before revenue is earned Accrued Liability expense incurred before cash is paid Accrued Asset revenue is earned before cash is received
Steps in the Accounting Cycle1. Collect and analyze info
2. Journalizetransactions
3. Post transactions togeneral ledger
4. Preparework sheet
5. Preparefinancial
statements
6. Record andpost adjusting
entries
7. Close theaccounts
LO6
The Closing Process
Purpose: To return the balance of revenue, expense, and dividend accounts to zero to begin the next period to transfer the net income of the period to Retained Earnings
RevenuesNormalbalance
Nominal AccountsExpenses
Normalbalance
DividendsNormalbalance
$ XX $ XX
$ XX
Zero outnominal accounts
to start accumulation of next period’s
results
Close to Income
Summary
$ XX
Close to Income
Summary
$ XX
Close to RetainedEarnings
$ XXLO7
Closing Entries
(Net loss) or Net Incomeclosed to Retained Earnings
Income Summary$XX
from revenueaccounts
$XX from expense
accounts
AppendixAccounting Tools:
Work Sheets
Unadjusted Trial Balance Columns
Begin by filling in the trial balance accounts and amounts
LO8
The Adjusting Entries Columns
Make adjustments; formal journal entries are prepared later
Adjusted Trial Balance ColumnsAdd or s
ubtract
adjustments
for a
djusted
account b
alances
The Income Statement Columns
Extend revenue and expense account balances to the income statement
The Balance Sheet Columns
Extend asset, liability, and equity accounts to the balance sheet