Chapter 3: accrual accounting
The accounting cycle= the process in which we record, classify, and aggregate
business transactions into financial statements
Learning objective 1: explain
Explain how accrual accounting differs from cash-basis accounting
Accrual accounting: records the impact of a business transaction when it occurs.
even if the payment is in the past or the future
Based on earning of revenue and incurrence of expenses
Used as accounting standard
Cash-basis accounting: records only cash transactions
Cash receipts: revenues
Cash payments: expenses
profit is when cash receipts are greater than cash payments
Based on the in- and outflow of money
Less relevant because it doesn’t follow accounting standards
Fails to capture the underlying economic phenomenon
Results in incomplete financial statements
Accrual accounting and cash flows
Accrual accounting is a more faithful representation of the reality. It records:
Cash transactions
o Collecting cash from customers
o Receiving cash from interest earned
o Paying salaries, rent, and other expenses
o Borrowing money
o Paying off loans
o Issuing shares
Non-cash transactions
o Sales and Purchases of inventory on account
o Accrual of expenses incurred but not yet paid
o Depreciation expense
o Usage of prepaid rent, insurance and supplies
o Earning of revenue when cash was collected in advance
, The time-period concept
Liquidation: selling everything, pay your liabilities and give the rest to your
shareholders
best way to see how well your company has performed not realistic
Time-period concept= accounting information is reported at regular intervals
They prepare an financial statement every year
Learning objective 2: apply
Apply the revenue and expense recognition principles
The revenue recognition principle
revenue should be recognized when an entity has satisfied its performance
obligation for an amount that reflects the consideration the entity expects to
receive in exchange for providing goods and services to customers.
Deals with two issues:
When to record (recognize) revenue
What amount of revenue to record
Revenue is recognized when:
After the amount has been earned
When there is and increase in assets or an decrease in liabilities
When a business delivers goods or services to its customer
The expense recognition principle
Includes two steps:
Identify all expenses incurred during the period
Measure the expenses and recognize them in the same period in which
any related revenues are earned •
To recognize an expense along with related revenues means to subtract
expenses from related revenues to compute net income or net loss.
( it will be recorded when it is spend)
The accounting cycle= the process in which we record, classify, and aggregate
business transactions into financial statements
Learning objective 1: explain
Explain how accrual accounting differs from cash-basis accounting
Accrual accounting: records the impact of a business transaction when it occurs.
even if the payment is in the past or the future
Based on earning of revenue and incurrence of expenses
Used as accounting standard
Cash-basis accounting: records only cash transactions
Cash receipts: revenues
Cash payments: expenses
profit is when cash receipts are greater than cash payments
Based on the in- and outflow of money
Less relevant because it doesn’t follow accounting standards
Fails to capture the underlying economic phenomenon
Results in incomplete financial statements
Accrual accounting and cash flows
Accrual accounting is a more faithful representation of the reality. It records:
Cash transactions
o Collecting cash from customers
o Receiving cash from interest earned
o Paying salaries, rent, and other expenses
o Borrowing money
o Paying off loans
o Issuing shares
Non-cash transactions
o Sales and Purchases of inventory on account
o Accrual of expenses incurred but not yet paid
o Depreciation expense
o Usage of prepaid rent, insurance and supplies
o Earning of revenue when cash was collected in advance
, The time-period concept
Liquidation: selling everything, pay your liabilities and give the rest to your
shareholders
best way to see how well your company has performed not realistic
Time-period concept= accounting information is reported at regular intervals
They prepare an financial statement every year
Learning objective 2: apply
Apply the revenue and expense recognition principles
The revenue recognition principle
revenue should be recognized when an entity has satisfied its performance
obligation for an amount that reflects the consideration the entity expects to
receive in exchange for providing goods and services to customers.
Deals with two issues:
When to record (recognize) revenue
What amount of revenue to record
Revenue is recognized when:
After the amount has been earned
When there is and increase in assets or an decrease in liabilities
When a business delivers goods or services to its customer
The expense recognition principle
Includes two steps:
Identify all expenses incurred during the period
Measure the expenses and recognize them in the same period in which
any related revenues are earned •
To recognize an expense along with related revenues means to subtract
expenses from related revenues to compute net income or net loss.
( it will be recorded when it is spend)
