Chapter 5 Notes
The Unit 2 test (covering chap 4 and chap 5) will
occur on Wed October 15
Fiscal Period
Fiscal Period is same as accounting
period.
 Fiscal period is the period of time
over which earnings are measured.
 What happens if the income statement
does not mention “when” part of the title?
 The readers have no idea whether the net
income is from one month of business
operation or one year of business
operation or one quarter of business
operation.
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Fiscal Period
The most common fiscal period for small
business is one year. The most common
fiscal period for big corporation is one
quarter ( = 3 months)
 The fiscal year does not have to be same
as the calendar year.
 For example, fiscal year can be May 1 to
April 30 of next year.
 If the income statement cover one
quarter starting from Nov 1 to January
31. How would you write down in the
income statement?
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Time Period Concept (GAAP)
Time period concept is an accounting
standard that provides accounting will
take place over consistent fiscal
periods.
 These fiscal periods have to be (are
usually) consistent such as one month,
one year or one quarter.
 In order to compare the performance of
managers or of the employees, the owner
(or manager) usually likes to see several
income statements such as income
statement of 2010, 2011, 2012 and 2013.
 Then they can easily see the trend.
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Revenue Recognition Principle
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It requires that revenue should be recorded in the
accounts at the time the transaction is
completed.
Transaction is completed = The service is
provided or the customer received the goods.
This accounting principle should be honored under
both Canadian GAAP and IFRS.
For example, if a customer buys laptop from
Futureshop on credit on Setpember 1st. The
customer pays the money on October 15. When can
futureshop record this transaction as revenue?
The futureshop should recognize the transaction on
September 1st.
The Matching Principle
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Separating revenue and expenses into
specific fiscal periods (such as one month
or one year) means that accountant must
follow two steps:
1. They must be careful to record the
proper amount of revenues in the
proper period.
2. They must subtract only those
expenses which helped earn the
revenue they recorded in step
one.
The Matching Principle
For most transactions, recording the
proper revenue is easy because
accountants mechanically follow the
revenue recognition principle.
 The matching principle states that each
expense item must be recorded in
the same period as the revenue that
the expense helped to earn.
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The Matching Principle
If accountants do not follow matching
principle, net income numbers will be
incorrect, meaning income statement will
show incorrect information.
 For example, if Futureshop purchased “flyer
service” from marketing company (called
MR Printing) on Nov 1, 2014 which will be
used for boxing day sale (December 26,
2014).
 Futureshop will pay the service fee on
January 15, 2015. (The flyer service fee is
$2000.)
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The Matching Principle
The fiscal period ends on December 31, when
will they record the advertising expense?
 The futureshop will record this advertising
expense in 2014 income statement because this
expense was used to generate the 2014
revenue.
 How will the futureshop record the
transactions?
 On November 1st, the accountant will credit
AP – Park Press account and debit
advertising expense account.
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The Matching Principle
On December 15, the accountant will debit
AP – Park Press account and credit
Bank account.
 If the flyer was for the two weeks of
December 24, 2014 to January 7 2015,
then would the transactions be different?
 Only half of the advertising expense
(=$1000) will be recorded in 2014
income statement and the rest of $1000
will be recorded in 2015 income
statement.
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The Matching Principle
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What is matching principle?
The Matching Principle
What if this company made income
statements every month? In which month,
should they record this advertising
expense?
 This advertising expense should be
recorded in December 2014 Income
Statement. (rather than Nov 2014 IS)
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The Matching Principle
If a construction company has two year
building project in Mississuaga downtown.
They will receive $10 million on December
31 2013. They started the building project
January 1, 2012.
 By December 31, 2012, accountant realizes
that the construction company already
incurred 3 million dollar expense for this
project. (and half of the work is done.)
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The Matching Principle
What happens if he just follows revenue
recognition principle?
 He must wait until Dec 31, 2013 in order to
record the revenue.
 What happens if he follows matching
principle?
 He can record half of the revenue at the
end of 2012.
 Which one (RRP or MP) delivers more
accurate net income numbers for 2012 and
2013?
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Classwork / Homework
P149 review questions #2, 4, 8, 9
 P150 Exercise #1 and #5
 P166 Review EX #4
 I will take up P150 Ex #2 today. (was HW
for yesterday)
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