Accrual Accounting & Recording Business Transactions Flashcards
Whats the difference between accrual basis & cash basis accounting?
- accrual basis accounting records the impact of business transactions as it occurs (recorded even if no cash is received/paid yet)
- IFRS requires accrual accounting
- cash basis accounting ignores underlying economic activities and purely records cash inflows and outflows
- does not consider payments on account and therefore mistakes financial statements
What underlying concepts do exist?
- Time period Concept
- Revenue Recognition Principle
- Expense Recognition Principle
Whats the time period concept?
The time period concept ensures that financial statements are prepared on a regular basis
—>at least annually
Whats the revenue recognition principle?
One should only record revenue when it has been earned
Difference between when a service is performed and when its paid
Whats the expense recognition principle?
Expenses should be recognized in the same period as the revenues to which they relate
Name the different adjusting entries
- Accruals
2. Deferrals
What are accruals and what do they involve?
An expense or a revenue that occurs before the business pays or receives cash
- Accounts receivable —> Asset
- Accounts payable —> Liability
What are deferrals and what do they involve?
The business paid or received cash in advance before the expense or revenue is recognized
- Prepaid Expenses —> Asset
- Unearned Revenue —> Liability
Beginning of november you were prepaid rent for 1.5 years for a total of 18.000€. At the end of december, which of the following entries would be correct?
A: Debit expense by 2000
B: Credit unearned revenues by 2000
C: Debit accounts receivable by 2000
D: Credit revenue by 2000
D
Under cash basis accounting, the transaction is recorded when…
the cash is received or paid
