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Chapter 4 - Accrual accounting concepts. This chapter include objectives: Explain the accrual basis of accounting and the reasons for adjusting entries, prepare adjusting entries for prepayments, prepare adjusting entries for accruals, prepare an adjusted trial balance and financial statements, prepare closing entries and a post-closing trial balance. | CHAPTER 4: ACCRUAL ACCOUNTING CONCEPTS LO 1: Explain the accrual basis of accounting and the reasons for adjusting entries. LO 2: Prepare adjusting entries for prepayments. LO 3: Prepare adjusting entries for accruals. LO 4: Prepare an adjusted trial balance and financial statements. LO 5: Prepare closing entries and a post-closing trial balance. LEARNING OBJECTIVES Users require financial information on a regular basis Accounting divides the economic life of a business into time periods Month, quarter (three months), year One-year period is known as the fiscal year Shorter periods are known as interim periods Many transactions affect more than one time period Timing Issues Revenue: Increase in assets (or settlement of liabilities) Income that results from a company’s ordinary activities In general, revenue is recognized In a merchandising company when merchandise is sold and delivered (point of sale) In a service company when the service is performed Under ASPE, revenue can be . | CHAPTER 4: ACCRUAL ACCOUNTING CONCEPTS LO 1: Explain the accrual basis of accounting and the reasons for adjusting entries. LO 2: Prepare adjusting entries for prepayments. LO 3: Prepare adjusting entries for accruals. LO 4: Prepare an adjusted trial balance and financial statements. LO 5: Prepare closing entries and a post-closing trial balance. LEARNING OBJECTIVES Users require financial information on a regular basis Accounting divides the economic life of a business into time periods Month, quarter (three months), year One-year period is known as the fiscal year Shorter periods are known as interim periods Many transactions affect more than one time period Timing Issues Revenue: Increase in assets (or settlement of liabilities) Income that results from a company’s ordinary activities In general, revenue is recognized In a merchandising company when merchandise is sold and delivered (point of sale) In a service company when the service is performed Under ASPE, revenue can be recognized when: Performance of an obligation is substantially complete Revenue can be reliably measured Collection is reasonably certain Revenue Recognition Under IFRS, new revenue standard (effective January 1, 2018) Five-step process to measure and report revenue: 1. Identify the contract with the client or customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. Allocate the transaction price to the performance obligations in the contract. Recognize revenue when (or as) the company satisfies the performance obligation. Revenue Recognition How might revenue be recognized for a large, publicly-traded transportation company? Compare this to how revenue might be recorded for a small convenience store. Discussion Questions 7 Expenses are recognized when: Due to ordinary activity, a decrease in future economic benefits occurs A decrease in an asset or an increase in a liability Can be measured reliably Tied to changes in assets and liabilities .
