D describe the need for accruals and other adjustments in preparing financial statements; Flashcards
Describe the need for accruals and other adjustments in preparing financial statements.
What does the principle of accrual accounting require?
The principle of accrual accounting requires that revenue is recorded when the firm earns it
Expenses are recorded as the firm incurs them, regardless of whether cash has actually been paid
What four categories do accruals fall into?
Unearned Revenue: Cash before provisions
Accrued Revenue: Provisions before cash
Prepaid Expenses: The firm pays cash ahead of time for an anticipated expense
Accrued Expenses: The firm owes cash for expenses it has incurred
Unearned Revenue record
+Cash=+Unearned Revenue
Ex: Subscriptions
Accrued Revenue record
+Accounts receivable=+Revenue (included in OE)
Ex: Manufacturer sells goods ‘on account’
Prepaid Expense record
- Cash,+Prepaid Expense
incurred: -Prepaid Expense=+Expenses(OE)
Ex: Rent
Accrued Expense Record
+Accrued Expenses +Expenses
When firm Pays: -Expenses
Ex: Wags payable
Similarities between Unearned Revenue and Prepaid Expenses
Cash first, revenue or expenses later
Similarities between accrued revenue and accrued expenses
Revenue or expense is realized before the cash
What makes accrual accounting effective?
To recognize revenues or expenses in the appropriate period.
A little bit about ‘valuation adjustments’
they update ‘historical costs’ to keep the equation in balance as changes in asset values also change OE through Gains or Losses recorded on the IS or in ‘other comprehensive income.’
Accrual accounting> Adjusting entry = reduction of an asset, recording of an expense
Prepaid expense
Accrual via Lacey
Earn interest as bank as we earn it, not exactly as we receive cash
Pay ins in adv: Write it off over time period of policy
When rec. Exp? At same time we earn Rev. aka ‘incurrence’
Which of the following is the least likely to be considered an accrual for accounting purposes?
A) Wages payable.
B) Accumulated depreciation.
C) Unearned revenue.
Your answer: B was correct!
Accruals fall into four categories:
1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.
Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.
Which of the following is the least likely to be considered an accrual for accounting purposes?
A) Wages payable.
B) Accumulated depreciation.
C) Unearned revenue.
Your answer: B was correct!
Accruals fall into four categories:
1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.
Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.
