Ch 4.1 Flashcards
What is the longest accountign time period
one year, this is often called the fiscal year
Fiscal year vs interim periods
fiscal year: one year
interim periods: monthly/quarterly periods
cash basis of accounting
REVENUE ONLY RECORDED WHEN CASH IS RECIEVED
EXPENSE ONLYYY RECORDED WHEN CASH IS PAID
accrual basis of accoqunting
revenues and expenses are recorded in the period where the events occur!
record reevenue even if cash has not been recieved
ex of accrual accounitng
1) revenues being recognized when they are earned even if cash has not been received.
2) expenses are recognized in the period in which goods (such as office supplies) are consumed or services (such as employees’ labour) are used, rather than only when cash is paid
Accrual accoutning is better or cash basis?
accrual accoutning, bc cash basis can be misleading!!
sales on account= revenue thats earned before cahs is recieved
salaries owed to employees= expense before cash is paid
what basis of accounting do you use in IFRS or ASPE
accrual basis of accounting
What is the definition of revenue
the term for INCREASES in benefits, reuslting from ORDINARY ACTIVITIES (a service company providing service, a bank making interest off loans)
What is the defintion of fains or income
the term for INCREASES in benefits resulting from what is a company’s NOT NORMAL activitiies
(a merchandising company earning gains from selling land)
Why is the distinction between revenue and income difficult?
Because 1) Understand what is the ordinary income type for a company
2) Is the money coming in from ordinary income> = REVENUE
3) Is the money coming in from not normal income> = INCOME OR GAINS
For a bank, earning money from interest on loans is revenue (INTEREST REVENUE)
For a cloth company, earning money from interest on loan given to a friend is income or gains (INTEREST INCOME)
ASPE- revenue recognition standard
“Earnings based approach”: REVENUE IS RECOGNIZED WHEN IT IS EARNED
1) Services have been provided or the risks/rewards has been transferred to buyer
2) The revenue can be reliable measured
3) The collection is reasonably assured
IFRS- revenue recognition standard
“Contract Based approach”: revenue recognized when a companys rights in a contrcat increase or the obligation it must satisfy in a contract decreases
BASICALLY, this happens when a company satisfies performance obligation (requirement to porvide g/s to customer)
5 step IFRS revenue recognition model
“Contract based approach”
1) Identify the contract w/ the client or customer: written/vbl contract; must be detaield; should impact company’s cash flows; is it probable to happen?
2) Identify the perfromance obligations in the contract: what does the company owe the client?
3) Determine transaction price: amount that company expects to recieve in exchange
4)Allocate transaction price to the perfromance obligations in te contracgt:
if company has multiple obligations to client, then transaction price assigned to each of them; compnay adds up all these amounts to find combined price
5) recognize revenue when/as the company satisfies obligation: when all th eobligations are met, company recognizes revenue
IFRS, does the contract have to be written?
NO, it can be verbal but should be written
How to do the 5 step IFRS revenue recognition problems?
1) Read carefully- remember revenue is only recognized when the performance obligation satisfied (performance is done)
2) compare the full price to the contract price (should be similar numbers)
3) IF there are multiple obligations, figure out what % of the full price is each obligation (should be proper integer number%)
4) think: by the time outlined in the question, which performance obligation is fulfilled?
5) use the %’s you found earlier to find how much revenue from the total ocntract price is recieved by the company!
How is expenses recognized
linked to revenue recognition, they are reported in the same reportnig period in which these expenses helped generate revenues
“MATCHING”
IS EXPENSE RECOGNITION under accrual accounting tied to cash recievment
NO
Expenses should follow revenue
MATCH EXPENSE WITH REVENEUES most of the time
Why are these not expenses:
Purchased equipment with a cost of $10,000.
Paid $2,700 for advertising that will run in the following month.
Declared dividends of $6,500.
1) assets are recorded
2)pre paid advertising
3) shareholder distribution is not expense
what is adjusting entries
required at the end of accounting periods to keep them up to date
why would you adjust entried
1) so you report asset/liabliity in the correc amounts
2) reveneues recorded in the period when they are earned
3) expenses are recorded in the period in which they ar eincurred
why can some accounts not be up to date?
1) things arent recroded daily ( salaries earned by employees)
2) some costs come about throuhg pasisng of time (Rent and insurance)
3) some item amounts may be unknown (Telephone bills)
WHy is there some time between end of accoutning perido and when companies release their FS?t
ADJUSTING ENTRIES PERIOD
What gets analyzed when adjusting accoutn entries?
the trial balance
Trial balance common name
UNADJUSTED TRIAL BALANCE
2 CLASSIFICIATIONS OF ADJUSTING ENTRIES
1) PREPAYMENTS
2) ACCRUALS
Adjusting entries- pre payments name
1) prepaid expenses: expenses paid in cash and these are RECORDED AS ASSETS BEFORE THEY GET USED
2) Deferred revenues: cash recieved and recorded as LIABILITIES before revenue is earned
Adjusting Entries- accurals type
1) Accrued expenses: expenses incurred for which cash has not been paid for yet, theese have not been recorded a sjournal entries
2) Accrued revenues: reveneues earned for which cash has yet to be recieved, have not been recorded as JEs
