Chapter 3 - Accrual Based Accounting

Accrual Based Accounting

Requires companies to measure and report accounting transaction WITHOUT the necessity that cash has been received or paid

Based on

*Revenue Recognition

*Expense Recognition (Matching Principle)

Revenue Recognition

Determine when and how much revenue is recognized

1) Identify the contract with the customer

2) Identify the performance obligations/promises in the contract

3) Determine the transaction price

4) Allocate the transaction price to the performance obligations in the contract

5) Recognize the revenue at the point the performance obligations have been satisfied

FOR MOST BUSINESSES = SALES REVENUE IS RECOGNIZED AT THE TIME THE GOODS/SERVICES ARE DELIVERED TO THE CUSTOMER

Revenue Recognition Examples

*Earned WHEN cash is received = Sales Revenue

*Earned BEFORE cash is received = Accts. Receivable (A)

*Earned AFTER cash is received = Unearned Revenue (L)

Expense Recognition (Matching Principle)

*Expenses incurred to generate revenue MUST be recognized in the same period

Adjusting

*Occurs at the end of each period to make necessary end of period adjustments to bring unadjusted accounts to proper balance

Types

*Deferrals

*Accruals

Defferals

*Cash is received/paid BEFORE revenue is earned or expense is incurred

*Pre-paid expense = Allocating previously recorded assets to expenses

*Unearned Revenues = Allocating previously recorded unearned revenue to revenue

Accruals

*Cash received or paid AFTER revenue is earned or an expense is incurred

*Accrued Expense = Recording operating expenses that have not yet been paid or recorded

*Accrued Revenues = Recording revenues that have not yet been recieved or recorded