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CHP 5 Accounting Fundamentals

This document provides an overview of accounting fundamentals, including the accrual basis of accounting, interim periods, revenue and expense recognition, adjusting entries, and accounting periods. It discusses key concepts such as the difference between the cash and accrual bases, how expenses are matched with revenues, and how adjusting entries reflect economic activities that have occurred but not yet been recorded. The document also summarizes the two general types of adjusting entries - deferrals and accruals - and how they affect balance sheet and income statement accounts.

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23 views

CHP 5 Accounting Fundamentals

This document provides an overview of accounting fundamentals, including the accrual basis of accounting, interim periods, revenue and expense recognition, adjusting entries, and accounting periods. It discusses key concepts such as the difference between the cash and accrual bases, how expenses are matched with revenues, and how adjusting entries reflect economic activities that have occurred but not yet been recorded. The document also summarizes the two general types of adjusting entries - deferrals and accruals - and how they affect balance sheet and income statement accounts.

Uploaded by

Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chp 5 Accounting

Fundamentals

when business activities are at


their lowest level of the annual
cycle
Financial
statements- Interim period- period of less
than a year
prepared on the accrual basis of
earned
in
the
accounting in order to meet Revenueaccounting period when the
their objectives: obligation to
services are rendered or the
pay cash in the future
goods sold are delivered
Cash basis- accountant does
not record a transaction until Expense recognition- basis
for recording expenses incurred
cash is received or paid
during the accounting period
Cash receipts- treated as
3 broad applications:
revenues
Direct association- expenses
Cash
paymentsas
are recognized in the income
expenses
statement between the costs
Liquidation- going out of
incurred and the earning of
business; only way to know
specific items of income
successfully a business has
Ex. Sales commission, costs
operated is to close its doors,
of goods sold
sell all its assets, pay the
Systematic and rational
liabilities and return any excess
allocation- expenses are
Periodicity concept- provide
incurred regardless of the
timely info, accountants have
revenues earned during
divided the economic life of a
the period
business into artificial time
Immediately- expense is
periods
recognized
when
an
Accounting periods- month, a
expenditure produces no
quarter or a year
future benefits
One year- most basic
Ex. Officers salaries
accounting period
Adjusting entries- reflect
Entities differ in their choice
in the accounts info on
of the accounting year- fiscal,
economic activities that
calendar, or natural
have occurred but have
Fiscal yearperiod of any
not yet been recorded
twelve consecutive months
Affects a balance sheet
Calendar year- annual period
account(asset/liability) &
ending on December 31
income
statement
Natural
business
yearaccount(income/expense)
twelve-month period that ends

2 general types:
Deferral- postponement of
the recognition of an
expense already paid but
not yet incurred/ revenue
already collected but not
yet earned recorded in a
balance sheet
Decreases the balance
sheet account and
increases an income
statement account
Accrual- recognition of an
expense already incurred
but unpaid/ revenue
earned but uncollected
Increases both a
balance sheet and an

income statement
account
2 important adjustments:
Prepaid expenses- assets
Asset that has expired
becomes an expense
because of the passage
of time or through use
and consumption

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