Chapter 4 Flashcards
Cash Basis accounting
Only record revenues and expenses done in CASH. Recognize when you get cash not when you do the service.—not very reliable
Accrual accounting
Recognize revenue and expenses ONLY when service is preformed or when expense takes place. Recognize service even if cash isn’t received–ex: pay for school but do not record until semester is finished and service is preformed.
Adjusting entries
Ensures that revenue recognition and expense recognition principles are followed-Never include cash
Deferrals
Cost of revenues that are recognized at a date later than the point when cash was originally exchanged- example: pay for school
Types of Deferrals
Prepaid expense and Unearned revenue
Prepaid expense
Expenses paid in cash and recorded as asset before they are used or consumed
Unearned revenue
Cash has been received for services that still need to be preformed—when service is preformed liability decreases because the obligation was already previously recorded
Accruals
Increase both balance sheet and income statement
Types of accruals
Accrued revenues and accrued expenses
Accrued revenues
revenues for serviced preformed but not yet received in cash or recorded
Example: preform golf lesson but havent received cash or recorded it
Accrued expenses
Expenses incurred but not yet paid in cash or recorded
interest on a loan have not paid or recorded it
Prepaid expenses examples
Insurance, supplies, advertising, rent, depreciation
Prepaid expense
Cash payment BEFORE expense recorded
Adjusting results in an increase (debit) to an expense account and a decrease (credit) to an asset account
Depreciation and accumulated depreciation recording
recorded as assets and CONTRA ASSET ACCOUNT accumulated depreciation is credited
Unearned revenue examples
Rent, magazine subscription, customer deposits for future service
