Kế toán, kiểm toán - Chapter 4: Accrual accounting concepts

CHAPTER 4:ACCRUAL ACCOUNTING CONCEPTSLO 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 OBJECTIVESUsers require financial information on a regular basisAccounting divides the economic life of a business into time periodsMonth, quarter (three months), yearOne-year period is known as the fiscal yearShorter periods are known as interim periodsMany transactions affect more than one time periodTiming IssuesRevenue: Increase in assets (or settlement of liabilities)Income that results from a company’s ordinary activitiesIn general, revenue is recognizedIn a merchandising company when merchandise is sold and delivered (point of sale)In a service company when the service is performedUnder ASPE, revenue can be recognized when:Performance of an obligation is substantially completeRevenue can be reliably measured Collection is reasonably certainRevenue RecognitionUnder 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 RecognitionHow 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 QuestionsExpenses are recognized when:Due to ordinary activity, a decrease in future economic benefits occursA decrease in an asset or an increase in a liabilityCan be measured reliablyTied to changes in assets and liabilitiesOften coincides with revenue recognitionRecognized, whenever possible, in the period in which effort is made to generate revenue Sometimes known as matchingExpense RecognitionIdentify some expenses that can be easily matched to revenue and some that aren’t as easily directly matched to the revenue they help produce.Discussion QuestionTransactions affecting a company’s financial statements are recorded in the period the events occur, rather than when cash is received or paidRevenue is recorded when earned, rather than when cash is receivedExpenses are recorded when goods or services are consumed or used, rather than when cash is paidAccrual Basis AccountingRevenue is recorded only when cash is receivedExpenses are recorded only when cash is paidCan lead to misleading information for decision-making:Timing differences between the occurrence of the actual event and its related cash flowsRevenue and expenses can be manipulated by timing the receipt and payment of cashCash Basis AccountingEntries made to adjust or update accounts at the end of the accounting periodRequired because the trial balance may not contain complete and up-to-date dataSome items are not recorded dailySome costs are not recorded during the accounting period, as they expire due to the passage of timeSome items may be unrecordedAdjusting EntriesPrepaymentsPrepaid expensesUnearned revenuesAccrualsAccrued expensesAccrued revenuesTypes of Adjusting EntriesCash payments of expenses that will benefit more than one accounting period recorded as assets When expenses are prepaid, an asset (prepaid expenses) is increased (debited) to show the future service or benefit, and cash is decreased (credited)Expire with the passage of time or through use Not practical to record this expiration on a daily basis, so done when statements are preparedAdjusting entry increases an expense account and decreases the asset (prepaid) accountPrepaid ExpensesCash received and recorded as liabilities before revenue is earnedWhen the cash is received, cash is increased (debited), and a liability account (unearned revenue) is increased (credited)The opposite of prepaid expensesAdjusting entry decreases the liability (unearned revenue) account and increases a revenue accountReflects amount of revenue earned in the period and the remaining liability at the end of the periodUnearned RevenueWhy are prepaid expenses a current asset?Why are unearned revenues a current liability?Discussion QuestionAccruals have not been recognized at all until an adjustment is madeExpenses that have been incurred, but not yet paid or recorded (accrued expenses)Adjusting entry results in an increase to both an expense and a liability accountRevenues that have been earned, but not received in cash (accrued revenues)Adjusting entry results in an increase to both an asset and a revenue accountAccrualsSummary of Basic RelationshipsPrepared after all adjusting entries have been recorded and postedShows the balances of all accounts at the end of the accounting period, including those accounts that have been adjustedProves total debit balances and total credit balances are equal after the adjusting entries have been madeThe main source for preparation of financial statementsAdjusted Trial BalanceRevenue, expense, and dividends declared accounts are components of retained earnings considered to be temporary accountsStatement of financial position accounts carry forward into the futureConsidered to be permanent accountsClosing entriesTemporary account balances are transferred to Retained EarningsProduce a zero balance in the temporary accounts to prepare them for the next period’s activityClosing EntriesTemporary and Permanent Accounts Close revenue accounts: Debit each revenue account for its balance and credit Income Summary the total revenue amount2. Close expense accounts:Debit Income Summary for the total expense amount and credit each expense account for its balance3. Close Income Summary: Debit (or credit) Income Summary for the balance in the account and credit (debit) Retained Earnings4. Close Dividends Declared account:Debit Retained Earnings and credit Dividends Declared account for the balanceThe Closing ProcessThe Closing Process IllustratedLists all permanent accounts and their balances after all closing entries are journalized and postedProves that total debit balances and total credit balances are equal after the closing entries have been madePost-Closing Trial BalanceAnalyze transactionsJournalize the transactionsPost to the ledger accountsPrepare a trial balanceJournalize and post adjusting entriesPrepare an adjusted trial balancePrepare financial statementsJournalize and post closing entriesPrepare a post-closing trial balanceSummary of the Accounting CycleChapter 3Chapter 4Comparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.