Elementary Accounting CH 3

Cash Basis Accounting

• Record revenue once you receive the cash

• Record expense when you pay cash

• Not GAAP

Accrual Basis of Accounting

• Revenue is recorded when it is earned

• Expenses are recognized as incurred (utilized/benefited)

• GAAP

Current Assets

Use the assets or convert it into cash within a year (accounts receivable keeps track of money owed for services)

Non-Current Assets

Assets used for a long period of time, without the need to spend or convert the assets into cash anytime soon

Accumulated Depreciation

Determines the useful life of the asset & allocates the cost over that period of time

• Asset not reduced directly

• Book value: Cost of asset - depreciation expense recorded

Pre-paid Expenses

The company pays cash (or has an obligation to pay) to acquire an asset that is not used until a later period.

• Depreciation → trying to match the expense to the use of the asset (time used)

Accumulated Depreciation (Credited)

Used to bring down the book value of an asset/item

• A.D. increases, the book value of that asset decreases

• Net impact: Cost - A.D.

Differed Revenues

Arise when a company receives cash in advance from customers, but products/services wont be provided until later.

• Adjustment:

  • 1. Decrease liability to the remaining amount owed

  • 2. Recognize revenue

Accurred Expenses

When a company incurs costs in the current period, but the company hasn’t yet paid cash for these costs.

• Adjustment

  • 1. Record liabilities to be paid

  • 2. Recognize the cost as an expense

Preparing Financial Statement

Ending R.E. = Beginning R.E. (Adjusted T.B.) + Net income (income statement) - dividends (adjusted T.B.)

Statement of stockholder’s equity

Common stock + R.E. from trial balance

Closing Earnings

Assets = Liabilities + S.E. (Cash, R.E., Revenue, equity, & dividends)

Temporary accounts closing earnings

Revenue, equity, dividends (RED)

Permanent accounts closing earnings

Assets, liabilities, equity (Cash & R.E.)