- **CH 3 Accrual Accounting** (Operating Transactions)
The two different basis of accounting:
******************************Accrual accounting****************************** records the impact of business transactions over the period in which they occur. Even if the resulting cash receipt or payment occurs outside the period.
********************************************Cash-basis accounting******************************************** records only cash transactions. And exactly when the cash changes hands.
The **Revenue recognition principle**. Revenue is recognized when:
- The entity transferred to the buyer the significant risks and rewards of ownership of the goods.
- The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
- The amount of revenue can be measured reliably.
- It is probable that the economic benefits associated with the transaction will flow to the entity.
- The costs incurred in respect of the transaction can be measured reliably.
Revenue should be recorded when it is earned, not when it was promised.
The **Expense recognition principle** is that basis for recording expenses.
> *Conceptual Framework states expenses are recognized when a direct association between the costs incurred and the earning of specific items is formed.*
> The **matching concept** matches expenses to revenue. Matching includes:
1. Identify decrease in assets or increase in liabilities that result in a reduction in equity during the period. This is an expense.
2. Measure theses expenses and subtract expenses from revenue to compute profit or loss.
A ******************deferral****************** is an adjustment for an item for which the business paid or received cash in advance.
An ****************accrual**************** is the opposite where the business paid or received cash after.
************************Depreciation************************ allocates the cost of an item of PPE to expense over the asset’s useful life.
**********************************Prepaid Expenses********************************** are when an service or good is paid before fully receiving.
******************Unearned Revenue****************** is when businesses collect cash before earning the revenue.
********************************Accrued Expense******************************** is a liability that arises from an expense that has not yet been paid. (Think interest in loan)
********************************Accrued revenue******************************** is when businesses earn revenue before they receive the cash. A revenue that has not been collected but earned.
The **Accumulated Depreciation** account shows the sum of all depreciation expense. Depreciation is an expense on the business as their PPE incurs depreciation.