Chapter 4 Accrual accounting concepts PDF

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Chapter4: Accrual accounting concepts 2020年10月1日 星期四

下午11:27

LO.1: Accrual basis acct, reasons of adjusting entry LO.2: Prepare adjusting entries for prepayments LO.3: Prepare adjusting entries for accruals. LO.4: Prepare an adjusted trail balance and financial statements LO.5: Prepare closing entries and a post-closing trail balance Fiscal year: accounting time period of one year Interim Period: monthly or quarterly Accrual vs. cash basis of accounting Accrual basis accounting: revenues are recognized when they are earned and expenses are recognized when they are incurred Cash basis accounting: revenues are recognized when cash is received and expenses are recognized when cash is paid Ordinary activities: what the company usually does Revenue recognition -ASPE use earnings-based approach Revenues are recognized when they are earned -IFRS use contract-based approach Performance obligation: A company's requirement to provide goods or servic to a customer, as outlined under a contract Five Step Model: 1. Identify the contract with the client or customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the cont 5. Recognize revenue when the company satisfies the performance obligat

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Ordinary revenue-generating activity Expense recognition: expenses are recorded in the period in which they are incurred Revenue recognition: revenues are recorded when earned Matching: Expense is matched with the revenues Adjusting entry • Asset and liability accounts are reported at their correct amounts • Revenues are recorded in the period in which they are earned • Expenses are recorded in the period in which they are incurred

STEP5: Adjusting entries for prepayments • Journal entry has been recorded during the accounting period and is lat adjusted Prepayment/ deferrals: company pay a cost in advance (increase current asset The party that pays in advance will have a prepaid expense, while the party receiving the payment will have a deferred revenue. Prepaid expenses: expenses paid in cash before they are used or consumed Transaction journal entry and adjusting journal entry: Debit asset account( prepaid expense) Credit cash account Debit Expenses Credit Asset (Prepaid expense) Depreciation

Debit asset account( prepaid expense) Credit cash account Debit Expenses Credit Asset (Prepaid expense) Depreciation Useful life: the period during which these economic benefits will be produced Depreciation: the process of allocating the cost of a long-lived or noncurrent asset. (ASPE use amortization instead of depreciation) Straight-line method of depreciation: Cost/Useful life=annual depreciation expense Depreciation journals: Debit Equipment and credit cash? Credit accumulated depreciation, debit depreciation expense Carrying amount: the difference between the cost of a depreciable asset and its related accumulated depreciation Deferred/unearned revenues Journal entry: Debit cash, credit deferred revenue(Liability) Debit deferred revenue, credit revenue Adjusting Entries for accruals • Accruals are recorded only by adjusting journal entries • Accrued expenses & accrued revenues Accrued expenses: expenses that have been incurred but not yet paid or recorded through transaction journal entries Adjust to record the obligations that exist at the end of the period and to recognize the expenses that have been incurred during the current accounting period An adjusting entry for accrued expenses debit expenses account and credit liability -Interest Principal amount x annual interest x months/12 = Interest Interest expense

Interest expense Interest Payable Adjusting Interest payable Bank Loan Payable Cash -Salaries Salaries Expense (days x per day salaries x people number) Salaries payable Adjusting Salaries payable Salaries expense cash Accrued revenues/accrued receivables: revenues that have been earned but not yet recorded through journal entries Adjusting journal entry: Receivable Revenue

Adjusting entries never involve cash account STEP6: Adjust trail balance Adjusted trail balance: shows the balance of all accounts after the adjusting entries have been posted at the end of the accounting period STEP7: Financial statements Statement of income Statement of changes in equity Statement of financial position Closing the books -Temporary accounts revenues, expenses, and dividends declared related to activities over a particular accounting period -Permanent accounts: asset, liability and shareholder's equity are not closed at the end of the period because their balances a re carried forward into future accounting periods. STEP8: Closing entries Are used to transfer the balances in the revenue, expense, and dividends declared accounts to the retained earning account, Accounting equation-before closing entries:

Closing entries result in a zero balance in each temporary account, are all transferred to retained earnings. Income Summary: short-lived account set up only to help with the closing process (Revenues and expense to calculate net income/loss, then put into income summary, income summary to retained earnings.) Closing process: (REID) 1. Close all revenue accounts 2. Close all expense accounts to income summary 3. Close income summary to retained earnings 4. Close dividend Declared to retained earnings Do not close dividends declared to the income summary account along with expenses • Draw a line below common shares (if new company), under retained earnings( if it is an established company), the companies below this line are temporary and should be closed 1. Close all revenue accounts to Income summary Debit Revenue, Credit income summary 2. Close all expenses to income summary Debit Income Summary, credit Expenses Balance in the Income summary account at this point should be equal to the net income 3. Close income summary to retained earnings Credit dividends declared, Debit retained earnings Note: 1 The balance in the income summary account immediately before

1. The balance in the income summary account, immediately before the final closing entry to transfer the balance to the Retained earnings account, should equal the net income in the Income Statement 2. All temporary accounts should have zero balances after closing 3. The balance in the retained earnings account should equal the ending balance reported in the statement of changes inequity and balance sheet after closing STEP9: Post-closing trail balance Unadjusted- Adjusted- Post-closing trail balance...