ACG2021 Chapter 3 (Principles of Financial Accounting)

1. Cash Basis Accounting

2. Accural Basis Accounting

You only record cash flow. When cash is received, revenues are recorded. When cash is paid, expenses are recorded.


*This does not follow GAAP but many small business use it since its simplicity

It only records revenue if it has been earned and only records expenses if they have been incurred.


"Incurred" means the business has received the benefit
ex)
-So, if I paid for next months electricity, it is considered an asset until I "incur" or use that electricity.

-So, if workers worked the last week of december, and I pay them in january, the expense is incurred in December since them working created an obligation that I have to pay them.

*This follows GAAP

Assumes that business activities can be sliced into time segments and that financial statments can be prepared for a specific period

An accounting year of any 12 consecutive months that may or may not concide with the calendar year

The revenue recognition principle tells accountants when to record revenue and requires companies follow a five-step process:

1. Identify the contract with the customer


2. Identify the performance obligation in the contract.

-What good or service does the business have to provide


3. Determine the transaction price

-What amount of revenue does the business get


4.Allocate the transaction price to the performance obligations in the contract. If the transaction has multiple performance obligations, the transaction price will need to be allocated among the different performance obligations.


5.Recognize revenue when the entity satisfies each performance obligation

(Sometimes called the expense recognition principle)



Guides accoutning for expenses and ensures

1.All expenses are recorded when they are incurred during a period

2.You record an expense at the same time that expense helped generate revenue



ex)

1.If I buy 1200 of insurance for next year, for each passing month, \$100 will be recorded as an expense.



2.If you buy \$60 shoes on December and sell them for \$100 in January. That expense of shoes is recorded will be recorded in January. The shoes in december are recorded as an asset.

An entry made at the end of the accounting period that is used to record revenue in the period they are earned and record expenses in the period they are incurred.

In a deferral's, the cash payment occurs before an expense is incurred or the cash receipt occurs before the revenue is earned.


*So cash is given or recieved, but the exepense or rveenue is delayed

An accrual records an expense before the cash is paid, or it records the revenue before the cash is received.


*You incured an expense before it was paid

*You got accured revenue


*No cash

1. Deferred expenses (deferral)
2. Deferred revenues (deferral)
3. Accrued expenses (accrual)
4. Accrued revenues (accrual)

*Also called, prepaid expenses


"They are deferrals because the expense is not recognized at the time of payment but deferred until they are used up. Such payments are considered assets rather than expenses until they are used up."

Property, Plant and Equipment

-Long lived, tangible assets, such as land, buildings, and equipment used in the operation of a business

The process at which a business spreads the cost of plant asset's over its useful life

The useful life is a just a reasonable estimate.



*This is to help record expenses when incurred in accrual accounting

The expected value of a depreciable asset at the end of its useful life.

A method to calculate depreciation



(Cost - Residual Value) / Useful Life



ex)

A company buys furniture for \$18,000, but after 5 years believes that the furniture will be worth nothing.



(\$18,000 - \$0)/5 years

\$3,6000 expense per year

It WOULD NOT be a decrease in the furitnute (asset) account. You still need to follow the cost principle.


Instead, you can record the in a separate Accumulating depreciation account (asset account) .



This account increases over time and has a normal credit balance.



*In a balance sheet, the account will be subtracted from the asset amount

1)A contra account is paired with and is listed immediately after its related account in the chart of accounts and associated financial statement.

2) A contra account’s normal balance (debit or credit) is the opposite of the normal balance of the related account.



ex)

Accumulating depreciation account would be the contra account to the furniture account.

A depicrable assets cost minus accululated depreciation

Yes

Amount of interest = Principle x Interest Rate x Time

Revenue which as been earned, but is yet to gte collected

1) They NEVER involve cash


2)Adjusting entries either

-Increase a revenue account (credit revenue)

-or, Increase an expense account (debit expense)

Deprication EXPENSE (you forgot)


Accumulated Deprication - Building

Step 5: Business journalize and post adjusting entries to record revenues to the period in which they are earned and the expenses to the period in which they occur.


Step 6: Prepare the adjusted trial balance

A worksheet is an internal document that helps summarize data for the preparation of the financial statements.

-IT IS NOT a journal, ledger or any other financial documents. It only helps prepare financial statements.

preprare financial statements.