chapter 4 Flashcards
What is the accrual basis of accounting?
Transactions are recorded in the period they occur, not when cash is received or paid.
Why is accrual basis accounting important?
It provides regular, timely, and accurate financial information.
How is revenue recognized under accrual accounting?
Revenue is recorded when earned, rather than when cash is received.
How are expenses recognized under accrual accounting?
Expenses are recorded when goods or services are used or consumed, not when cash is paid.
Why is cash basis accounting not allowed for reporting purposes?
It can lead to misleading information for decision-making.
What is revenue?
An increase in assets (or settlement of liabilities) resulting from a company’s ordinary activities.
When is revenue recognized in a merchandising company?
When merchandise is sold and delivered (point of sale).
When is revenue recognized in a service company?
When the service is performed.
What are the three conditions for revenue recognition under ASPE?
- Performance is substantially complete
- Revenue is reliably measurable
- Collection is reasonably certain.
What is the five-step process for revenue recognition under IFRS?
Identify the contract, identify performance obligations, determine the transaction price, allocate the price, recognize revenue when obligations are met.
When are expenses recognized?
When a decrease in economic resources occurs (assets consumed or liabilities incurred).
What is the matching principle?
Expenses should be recognized in the period in which they help generate revenue.
What are adjusting entries?
Entries made at the end of an accounting period to update account balances.
Why are adjusting entries necessary?
Because the trial balance may not contain complete and up-to-date data.
What are the two main types of adjusting entries?
Prepayments and accruals.
What are prepayments?
Payments made in advance for expenses that will be used in the future.
How are prepaid expenses recorded initially?
Dr. Prepaid Expense, Cr. Cash.
How is a prepaid expense adjusted?
Dr. Expense, Cr. Prepaid Expense.
What is deferred revenue?
Revenue received in advance for services or goods yet to be provided.
How is deferred revenue recorded initially?
Dr. Cash, Cr. Deferred Revenue.
How is deferred revenue adjusted?
Dr. Deferred Revenue, Cr. Revenue.
What are accruals?
Revenues earned or expenses incurred that have not yet been recorded.
What are accrued expenses?
Expenses that have been incurred but not yet recorded or paid.
How are accrued expenses recorded?
Dr. Expense, Cr. Accounts Payable.
