Lecture 3 - Accrual Accounting (Chapter 3) Flashcards
Accrual accounting, cash-basis accounting, deferrals, accruals, the Revenue Principles, the Expense Recognition Principle
Account for the accrual accounting method.
“Revenues and expenses are recorded when they’re earned or incurred, regardless of when the cash is actually received or paid.” (ChatGPT)
Account for the cash-basis accounting method.
“Revenues and expenses are recorded when cash is received or paid.” (ChatGPT)
True or false: the majority of companies use the cash-basis accounting method.
False (they use the accrual accounting method)
Provide examples of some of the cash transactions that the accrual accounting method records.
Collecting cash from customers, borrowing money, issuing shares.
What does the matching concept/principle show?
“Expenses should be recorded in the same period as the revenues that they’ve helped generate.” The matching concept/principle helps ensure that financial statements are accurate. (ChatGPT)
True or false: unearned revenues = deferred income.
True
What does “accrued expenses” mean?
“Accrued expenses are expenses that have been incurred, but not paid yet.” This means that a company owes money for something it’s already used or received, but it hasn’t been paid yet. (ChatGPT)
Do accrued expenses increase or decrease liabilities?
They increase liabilities.
Do accrued expenses increase or decrease equity?
They decrease equity.
How do you calculate “Net amount of PPE”?
Net amount of PPE = Total cost of PPE - Accumulated depreciation
What does “depreciation” refer to?
Depreciation is the process of allocating (distributing) the cost of a tangible asset over its useful life.
What’s an intangible asset? Provide examples.
It’s a physical item that has monetary value. Examples include buildings, machines, and inventory.
Does the accrual accounting method align with IFRS?
Yes.
Does the cash-basis accounting method align with IFRS?
No.
What’s a deferral?
“A deferral is when a company delays recognizing revenues and/or expenses until a future period.” (ChatGPT)
What’s an accrual?
“An accrual is when a company records revenues and/or expenses before cash is received or paid.” (ChatGPT)
What does the Revenue Principle say?
It says that revenue should be recorded when it’s earned, regardless of when cash is received.
What does the Expense Recognition Principle say?
It says that expenses should be recorded in the same period as the revenues that they’ve helped generate.
Every adjusting entry affects what?
- Revenue or expenses (to measure income)
- Assets or liabilities (to update the balance sheet)
