Kế toán, kiểm toán - Accrual accounting concepts

Accrual Accounting ConceptsKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition4Prepare adjusting entries for deferrals.CHAPTER OUTLINEExplain the accrual basis of accounting and the reasons for adjusting entries.12LEARNING OBJECTIVESPrepare adjusting entries for accruals.3Prepare an adjusted trial balance and closing entries.4LEARNING OBJECTIVEExplain the accrual basis of accounting and the reasons for adjusting entries.1LO 1 Generally a month, a quarter, or a year.Fiscal year vs. calendar year.Accountants divide the economic life of a business into artificial time periods (Periodicity Assumption).Jan.Feb.Mar.Apr.Dec.. . . . .▼ HELPFUL HINTAn accounting time period that is one year long is called a fiscal year.Periodicity AssumptionReview QuestionWhat is the periodicity assumption?Companies should recognize revenue in the accounting period in which it is earned.Companies should match expenses with revenues.The economic life of a business can be divided into artificial time periods.The fiscal year should correspond with the calendar year.LO 1 Companies recognize revenue in the accounting period in which the performance obligation is satisfied.REVENUE RECOGNITION PRINCIPLELO 1 Illustration: Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be:REVENUE RECOGNITION PRINCIPLELO 1 “Let the expenses follow the revenues.”ILLUSTRATION 4-1EXPENSE RECOGNITION PRINCIPLELO 1 ILLUSTRATION 4-1 GAAP relationships in revenue and expense recognitionEXPENSE RECOGNITION PRINCIPLELO 1 INVESTOR INSIGHTReporting Revenue AccuratelyThe Until recently, electronics manufacturer Apple was required to spread the revenues from iPhone sales over the two-year period following the sale of the phone. Accounting standards required this because Apple was obligated to provide software updates after the phone was sold. Since Apple had service obligations after the initial date of sale, it was forced to spread the revenue over a two-year period. As a result, the rapid growth of iPhone sales was not fully reflected in the revenue amounts reported in Apple’s income statement. A new accounting standard now enables Apple to report much more of its iPhone revenue at the point of sale. It was estimated that under the new rule revenues would have been about 17% higher and earnings per share almost 50% higher.Apple Inc.LO 1 Accrual-Basis AccountingTransactions recorded in the periods in which the events occur.Revenues are recognized when services performed, even if cash was not received. Expenses are recognized when incurred, even if cash was not paid.ACCRUAL VERSUS CASH BASISLO 1 Cash-Basis AccountingRevenues are recognized only when cash is received.Expenses are recognized only when cash is paid. Not in accordance with generally accepted accounting principles (GAAP).ACCRUAL VERSUS CASH BASISLO 1 20162017Illustration: Suppose that Fresh Colors paints a large building in 2016. In 2016, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2017.ACCRUAL VERSUS CASH BASISILLUSTRATION 4-2Accrual-versus cash-basis accountingLO 1 Periodicity AssumptionReview QuestionWhich one of these statements about the accrual basis of accounting is false?Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged.Companies recognize revenue in the period in which the performance obligation is satisfied.This basis is in accord with generally accepted accounting principles. Companies record revenue only when they receive cash, and record expense only when they pay out cash.LO 1 Adjusting entries ensure that the revenue recognition and expense recognition principles are followed.are required every time a company prepares financial statements. includes one income statement account and one balance sheet account.THE NEED FOR ADJUSTING ENTRIESLO 1 Adjusting entries are made to ensure that:a. expenses are recognized in the period in which they are incurred.b. revenues are recognized in the period in which the performance obligation is satisfied. c. balance sheet and income statement accounts have correct balances at the end of an accounting period.d. All of the above.Review QuestionTHE NEED FOR ADJUSTING ENTRIESLO 1 Deferrals: 1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned revenues: Cash received before service are performed.Accruals: 1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.TYPES OF ADJUSTING ENTRIESILLUSTRATION 4-3Categories of adjusting entriesLO 1 LO 1 Trial Balance – Each account is analyzed to determine whether it is complete and up-to-date.TYPES OF ADJUSTING ENTRIESILLUSTRATION 4-4Trial balanceTiming ConceptsBelow is a list of concepts in the left column, with descriptions of the concepts in the right column. There are more descriptions provided than concepts. Match the description of the concept to the concept.DO IT!1LO 1 1. ____ Accrual-basis accounting.2. ____ Calendar year.3. ____ Periodicity assumption.4. ____ Expense recognition principle.(a) Monthly and quarterly time periods.(b) Efforts (expenses) should be matched with results (revenues).(c) Accountants divide the economic life of a business into time periods.(d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that starts on January 1 and ends on December 31.(f) Companies record transactions in the period in which the events occur.fecbAnalyze business transactionsJournalizePostTrial BalanceJournalize and Post Adjusting EntriesAdjusted Trial BalanceFinancial StatementsClosing EntriesPost-Closing Trial BalanceTo defer means to postpone or delay. LO 2 LEARNING OBJECTIVEPrepare adjusting entries for deferrals.2Deferrals are either: Prepaid expenses OR Unearned revenues.DeferralsLO 2 Expenses paid in cash before they are used or consumed.insurancesuppliesadvertisingCash PaymentExpense RecordedBEFORErentequipmentbuildingsPrepayments often occur in regard to:PREPAID EXPENSESLO 2 Prepaid ExpensesCosts that expire either with the passage of time or through use.Adjusting entry results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.PREPAID EXPENSESLO 2 Adjusting entries for prepaid expensesIncreases (debits) an expense account and Decreases (credits) an asset account.ILLUSTRATION 4-5Adjusting entries for prepaid expensesPREPAID EXPENSESLO 2 Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.Supplies1,500Supplies Expense1,500Oct. 31ILLUSTRATION 4-6($2,500 – 1,000 = $1,500)SuppliesLO 2 Illustration: On October 4, Sierra Corporation paid $600 for a one-year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month.Prepaid Insurance50Insurance Expense50Oct. 31ILLUSTRATION 4-7InsuranceLO 2 Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.Depreciation is the process of allocating the cost of an asset to expense (depreciation) over its useful life.Depreciation does not attempt to report the actual change in the value of the asset.DepreciationLO 2 Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month.Accumulated Depreciation-Equipment40Depreciation Expense40Oct. 31ILLUSTRATION 4-8DepreciationLO 2 Statement PresentationAccumulated Depreciation-Equipment is a contra asset account.Appears just after the account it offsets (Equipment) on the balance sheet. ILLUSTRATION 4-9Balance sheet presentation ofaccumulated depreciationDepreciation▼ HELPFUL HINTAll contra accounts have increases, decreases, and normal balances opposite to the account to which they relate.LO 2 ILLUSTRATION 4-10Accounting for prepaid expensesPREPAID EXPENSESLO 2 Receipt of cash recorded as a liability before services are performed.rentairline ticketsCash ReceiptRevenue RecordedBEFOREmagazine subscriptionscustomer depositsUnearned revenues often occur in regard to:UNEARNED REVENUESLO 2 Adjusting entry is made to record the revenue for services performed during the period and to show the liability that remains.Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.UNEARNED REVENUESLO 2 Adjusting entries for unearned revenuesDecrease (a debit) to a liability account. Increase (a credit) to a revenue account.ILLUSTRATION 4-11UNEARNED REVENUESLO 2 Illustration: Sierra Corporation received $1,200 on October 2 from R. Knox for guide services for multi-day trips expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Sierra performed for Knox during October, the company determines that it has earned $400 in October.Service Revenue400Unearned Service Revenue400Oct. 31ILLUSTRATION 4-12UNEARNED REVENUESLO 2 ILLUSTRATION 4-13Accounting for unearned revenuesUnearned Revenues recorded in liability accounts are now recognized as revenue for services performed.ACCOUNTING FOR UNEARNED REVENUESExamplesReason for AdjustmentAccounts BeforeAdjustmentAdjustingEntryRent, magazine subscriptions, customer deposits for future service.Liabilities overstated.Revenues understated.Dr. Liabilities Cr. RevenuesUNEARNED REVENUESLO 2 ACCOUNTING ACROSS THE ORGANIZATIONTurning Gift Cards into RevenueThose of you who are marketing majors (and even most of you who are not) know that gift cards are among the hottest marketing tools in merchandising today. Customers purchase gift cards and give them to someone for later use. In a recent year, gift-card sales were expected to exceed $124 billion. Although these programs are popular with marketing executives, they create accounting questions. Should revenue be recorded at the time the gift card is sold, or when it is exercised? How should expired gift cards be accounted for? In a recent balance sheet, Best Buy reported unearned revenue related to gift cards of $406 million. Source: “2014 Gift Card Sales to Top $124 Billion, But Growth Slowing,” PRNewswire (December 10, 2014).LO 2 Adjusting Entries for DeferralsThe ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated Depreciation—Equipment $5,000Unearned Service Revenue 9,200An analysis of the accounts shows the following.1. Insurance expires at the rate of $100 per month.2. Supplies on hand total $800.3. The equipment depreciates $200 a month.4. During March, services were performed for $4,000 of the unearned service revenue reported.Prepare the adjusting entries for the month of March.DO IT!2LO 2 Adjusting Entries for DeferralsThe ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated Depreciation—Equipment $5,000Unearned Service Revenue 9,200Prepare the adjusting entries for the month of March.Insurance expires at the rate of $100 per month.SOLUTIONDO IT!2Insurance Expense 100 Prepaid Insurance 100LO 2 Adjusting Entries for DeferralsThe ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated Depreciation—Equipment $5,000Unearned Service Revenue 9,200Prepare the adjusting entries for the month of March.Supplies on hand total $800.SOLUTIONDO IT!2Supplies Expense 2,000 Supplies 2,000LO 2 Adjusting Entries for DeferralsThe ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated Depreciation—Equipment $5,000Unearned Service Revenue 9,200Prepare the adjusting entries for the month of March.The equipment depreciates $200 a month.SOLUTIONDO IT!2Depreciation Expense 200 Accumulated Depreciation 200LO 2 Adjusting Entries for DeferralsThe ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared. Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated Depreciation—Equipment $5,000Unearned Service Revenue 9,200Prepare the adjusting entries for the month of March.During March, services were performed for $4,000 of the unearned service revenue reported.SOLUTIONDO IT!2Unearned Service Revenue 4,000 Service Revenue 4,000LO 2 Analyze business transactionsJournalizePostTrial BalanceJournalize and Post Adjusting EntriesAdjusted Trial BalanceFinancial StatementsClosing EntriesPost-Closing Trial BalanceIncrease both a balance sheet and an income statement account. LO 3 LEARNING OBJECTIVEPrepare adjusting entries for accruals.3Made to record: Revenues for services performed and ORExpenses incurred in the current accounting period that have not been recognized through daily entries.Adjusting Entries for AccrualsLO 3 Revenues for services performed but not yet received in cash or recorded.rentinterestservices performedBEFOREAccrued revenues often occur in regard to:Cash ReceiptRevenue RecordedAdjusting entry results in:ACCRUED REVENUESLO 3 Accrued RevenuesAn adjusting entry serves two purposes: Shows the receivable that exists, and Records the revenues for services performed.ACCRUED REVENUESLO 3 Adjusting entries for accrued revenuesIncreases (debits) an asset account. Increases (credits) a revenue account.ILLUSTRATION 4-14ACCRUED REVENUESLO 3 Illustration: In October, Sierra Corporation performed guide services for $200 that were not billed to clients before October 31.Service Revenue200Accounts Receivable200Oct. 31ILLUSTRATION 4-15ACCRUED REVENUESLO 3 ILLUSTRATION 4-16Accounting for accrued revenuesServices performed but not yet received in cash or recorded.ACCOUNTING FOR ACCRUED REVENUESExamplesReason for AdjustmentAccounts BeforeAdjustmentAdjustingEntryInterest, rent, services performed but not collected.Assets understated.Revenues understated.Dr. Assets Cr. RevenuesACCRUED REVENUESLO 3 Expenses incurred but not yet paid in cash or recorded.BEFOREAccrued expenses often occur in regard to:Cash PaymentExpense RecordedutilitiessalariesAdjusting entry results in:InteresttaxesACCRUED EXPENSESLO 3 An adjusting entry serves two purposes: Records the obligations, andRecognizes the expenses. ACCRUED EXPENSESLO 3 Adjusting entries for accrued expensesIncreases (debits) an expense account. Increases (credits) a liability account.ILLUSTRATION 4-17ACCRUED EXPENSESLO 3 Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%.Interest Payable50Interest Expense50Oct. 31ILLUSTRATION 4-19ILLUSTRATION 4-18Formula for computing interestAccrued Interest$5,000 x 12% x 1/12 = $50LO 3 ILLUSTRATION 4-20Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3 days).Accrued SalariesLO 3 Salaries and Wages Payable1,200Salaries and Wages Expense1,200Oct. 31ILLUSTRATION 4-21Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3 days).Accrued SalariesLO 3 ILLUSTRATION 4-22Accounting for accrued expensesACCRUED EXPENSESLO 3 PEOPLE, PLANET, AND PROFIT INSIGHTGot Junk?Do you have an old computer or two in your garage? How about an old TV that needs replacing? Many people do. Approximately 163,000 computers and televisions become obsolete each day. Yet, in a recent year, only 11% of computers were recycled. It is estimated that 75% of all computers ever sold are sitting in storage somewhere, waiting to be disposed of. Each of these old TVs and computers is loaded with lead, cadmium, mercury, and other toxic chemicals. If you have one of these electronic gadgets, you have a responsibility, and a probable cost, for disposing of it. Companies have the same problem, but their discarded materials may include lead paint, asbestos, and other toxic chemicals.LO 3 ILLUSTRATION 4-23Summary of adjusting entriesSUMMARY OF BASIC RELATIONSHIPSLO 3 Adjusting Entries for AccrualsMicro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. The following information relates to August.At August 31, the company owed its employees $800 in salaries that will be paid on September 1.On August 1, the company borrowed $30,000 from a bank on a 15-year mortgage. The annual interest rate is 10%.Revenue for services performed but unrecorded for August totaled $1,100.Prepare the adjusting entries needed at August 31, 2017.DO IT!3LO 3 Adjusting Entries for AccrualsMicro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.At August 31, the company owed its employees $800 in salaries that will be paid on September 1.SOLUTIONDO IT!3Salaries and Wages Expense 800 Salaries and Wages Payable 800LO 3 Adjusting Entries for AccrualsMicro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.On August 1, the company borrowed $30,000 from a bank on a 15-year mortgage. The annual interest rate is 10%.SOLUTIONDO IT!3Interest Expense 250 Interest Payable 250LO 3 Adjusting Entries for AccrualsMicro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.Revenue for services performed but unrecorded for August totaled $1,100.SOLUTIONDO IT!3Accounts Receivable 1,100 Service Revenue 1,100LO 3 Analyze business transactionsJournalizePostTrial BalanceAdjusting EntriesAdjusted trial balancePrepare financial statementsJournalize and post closing entriesPrepare a post-closing trial balanceLO 4 LEARNING OBJECTIVEPrepare an adjusted trial balance and closing entries.4After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).The adjusted trial balance’s purpose is to prove the equality of debit balances and credit balances in the ledger. The adjusted trial balance is the primary basis for the preparation of the financial statements.PREPARE ADJUSTED TRIAL BALANCELO 4 LO 4 ILLUSTRATION 4-26Adjusted trial balancePREPARE ADJUSTED TRIAL BALANCEWhich of the following statements is incorrect concerning the adjusted trial balance?An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.The adjusted trial balance provides the primary basis for the preparation of financial statements. The adjusted trial balance lists the account balances segregated by assets and liabilities. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.Review QuestionLO 4 Financial statements are prepared directly from the Adjusted Trial Balance. Balance SheetIncome StatementRetained Earnings Statement PREPARING FINANCIAL STATEMENTSLO 4 ILLUSTRATION 4-27Preparation of the income statement and retained earnings statement from the adjusted trial balance4-68ILLUSTRATION 4-28Preparation of the balance sheet from the adjusted trial balanceLO 4 Quality of Earnings – company provides full and transparent information.Earnings Management - the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Companies may manage earnings by:one-time items to prop up earnings numbers.inflating revenue numbers in the short-run.improper adjusting entries.As a result of the Sarbanes-Oxley Act, many companies are trying to improve the quality of their financial reporting.QUALITY OF EARNINGSLO 4 Trial BalanceDO IT!4aLO 4 Trial BalanceDO IT!(a) Determine the net income for the quarter April 1 to June 30.LO 4 4aTrial BalanceDO IT!Determine the total assets and total liabilities at June 30, 2017.LO 4 4aTrial BalanceDO IT!Determine the balance in Retained Earnings at June 30, 2017.Retained earnings, April 1 $ 0Add: Net income 2,490Less: Dividends 600Retained earnings, June 30 $1,890LO 4 4aAt the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders’ equity account—Retained Earnings.ILLUSTRATION 4-29Temporary versus permanent accountsCLOSING THE BOOKSLO 4 In addition to updating Retained Earnings to its correct ending balance, closing entries produce a zero balance in each temporary account.ILLUSTRATION 4-30The closing processPreparing Closing EntriesLO 4 LO 4 ILLUSTRATION 4-31Illustration 4-32Posting of closing entriesPreparing Closing EntriesLO 4 The purpose of the post-closing trial balance is to prove the equality of the permanent account balances that the company carries forward into the next accounting period.All temporary accounts will have zero balances.Preparing a Post-Closing Trail BalanceLO 4 1. Analyze business transactions2. Journalize the transactions 6. Prepare an adjusted trial balance7. Prepare financial statements8. Journalize and post closing entries9. Prepare a post-closing trial balance4. Prepare a trial balance3. Post to ledger accountsJournalize and post adjusting entries: Deferrals/AccrualsILLUSTRATION 4-33Required steps in the accounting cycleSUMMARY OF THE ACCOUNTING CYCLELO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 SUMMARY OF THE ACCOUNTING CYCLEILLUSTRATION 4-33Required steps in the accounting cycleLO 4 Sierra Corporation’s income statement shows net income of $2,860. Net income and net cash provided by operating activities often differ. Net income on a cash basis is referred to as “Net cash provided by operating activities.” The statement of cash flows, reports net cash provided by operating activities. Illustration 4-27KEEPING AN EYE ON CASHLO 4 The difference for Sierra is $2,840 ($5,700 - $2,860). The following summary shows the causes of this difference.LO 4 KEEPING AN EYE ON CASHClosing EntriesHancock Company has the following balances in selected accounts of its adjusted trial balance.Accounts Payable $27,000 Dividends $15,000Service Revenue 98,000 Retained Earnings 42,000Rent Expense 22,000 Accounts Receivable 38,000Salaries and Wages Expense 51,000 Supplies Expense 7,000Prepare the entries to close the revenue and expense accounts.SOLUTIONDO IT!4bService Revenue 98,000 Income Summary 98,000Income Summary 80,000 Salaries and Wages Expense 51,000 Rent Expense 22,000 Supplies Expense 7,000LO 4 Closing EntriesHancock Company has the following balances in selected accounts of its adjusted trial balance.Accounts Payable $27,000 Dividends $15,000Service Revenue 98,000 Retained Earnings 42,000Rent Expense 22,000 Accounts Receivable 38,000Salaries and Wages Expense 51,000 Supplies Expense 7,000Prepare the entries to close income summary and dividends.SOLUTIONDO IT!4bIncome Summary 18,000 Retained Earnings 18,000Retained Earnings 15,000 Dividends 15,000LO 4 LO 5 LEARNING OBJECTIVEAPPENDIX 4A: Describe the purpose and the basic form of a worksheet.*5Worksheet A multiple-column form that may be used in the adjustment process and in preparing financial statements.Manual or computer spreadsheet.A working tool, not a permanent accounting record.Neither a journal nor a part of the general ledger.ILLUSTRATION 4A-1Form and procedure for a worksheetSIERRA CORPORATIONWorksheetFor the Month Ended October 31, 2017LO 5 (a)(b)(a)(g)(c)(d)(d)(e)(b)(e)(f)(f)(g)(c)ILLUSTRATION 4A-1Form and procedure for a worksheetSIERRA CORPORATIONWorksheetFor the Month Ended October 31, 2017LO 5 KEY POINTSA Look at IFRSLEARNING OBJECTIVECompare the procedures for adjusting entries under GAAP and IFRS.6SimilaritiesCompanies applying IFRS also use accrual-basis accounting to ensure that they record transactions that change a company’s financial statements in the period in which events occur. Similar to GAAP, cash-basis accounting is not in accordance with IFRS.LO 6 A Look at IFRSKEY POINTSSimilaritiesIFRS also divides the economic life of companies into artificial time periods. Under both GAAP and IFRS, this is referred to as the periodicity assumption. The general revenue recognition principle required by GAAP that is used in this textbook is similar to that used under IFRS. Revenue recognition fraud is a major issue in U.S. financial reporting. The same situation occurs in other countries, as evidenced by revenue recognition breakdowns at Dutch software company Baan NV, Japanese electronics giant NEC, and Dutch grocer Ahold NV.LO 6 A Look at IFRSKEY POINTSDifferencesUnder IFRS, revaluation (using fair value) of items such as land and buildings is permitted. IFRS allows depreciation based on revaluation of assets, which is not permitted under GAAP. The terminology used for revenues and gains, and expenses and losses, differs somewhat between IFRS and GAAP. For example, income under IFRS includes both revenues, which arise during the normal course of operating activities, and gains, which arise from activities outside of the normal sales of goods and services.LO 6 A Look at IFRSKEY POINTSDifferencesUnder IFRS, expenses include both those costs incurred in the normal course of operations as well as losses that are not part of normal operations. This is in contrast to GAAP, which defines each separately.LO 6 A Look at IFRSLOOKING TO THE FUTUREThe IASB and FASB are completing a joint project on revenue recognition. The purpose of this project is to develop comprehensive guidance on when to recognize revenue. It is hoped that this approach will lead to more consistent accounting in this area. For more on this topic, see www.fasb.org/project/revenue_recognition.shtml.LO 6 IFRS PracticeIFRS:uses accrual accounting.uses cash-basis accounting.allows revenue to be recognized when a customer makes an order.requires that revenue not be recognized until cash is received.A Look at IFRSLO 6 IFRS PracticeWhich of the following statements is false?IFRS employs the periodicity assumption.IFRS employs accrual accounting.IFRS requires that revenues and costs must be capable of being measured reliably.IFRS uses the cash basis of accounting.A Look at IFRSLO 6 IFRS PracticeAccrual-basis accounting:is optional under IFRS.results in companies recording transactions that change a company’s financial statements in the period in which events occur.has been eliminated as a result of the IASB/FASB joint project on revenue recognition.is not consistent with the IASB conceptual framework.A Look at IFRSLO 6 “Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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