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PSU ACCTG 211 - Accrual Accounting

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ACCTG 211 1st Edition Lecture 4Outline of Last Lecture I. More Examples on how transactions affect the accounting equationII. How to find the income statementIII. How to find the statement of changes in shareholder’s equityIV. How to calculate a balance sheetHow to calculate cash flows V. Examples of problems discussing cash flowOutline of Current Lecture I. Short Term VS Long Term Accounting II. Cash Basis Accounting III. Accrual Accounting IV. Accrual AccountsV. Revenue Recognition PrincipleVI. Expense Recognition PrincipleVII. Matching Principle VIII. There are 5 types of adjustmentsIX. Examples of the 5 types of Adjustments X. INTEREST EXPENSEXI. DEPRECIATIONCurrent LectureXII. Short Term VS Long Term Accounting a. Only assets and liabilities can be classified into short term or long termi. Shareholder’s Equity simply splits into the two separate parts of contributed capital and earned capital.b. Long Termi. A liability or asset that will be in the company for more than one yearc. Short Termi. A liability or asset that will be in the company for less than one yearXIII. Cash Basis Accounting a. Treats incoming cash as revenues and outgoing cash as expenses. b. The IRS uses this method for incomes and taxation rules. c. However we will not be using cash basis accounting in this class, and it is not approved by GAAP. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.XIV. Accrual Accounting a. The time of when an expense or revenue is “recognized” is separate from when the cash is actually received or disbursed. i. Recognize means to include on the financial statements.1. Usually speaking about the income statement hereXV. Accrual Accountsa. Used in accrual accounting i. Accounts Receivable, Accounts Payable, various Prepaid accounts, and various Deferred accounts. b. It helps to think of accrual accounts as “parking spots” on the balance sheet which we can think of as the “parking lot”i. You put money in one of these “parking spots” and it stays there until you have reason to increase or decrease it1. Balance sheets are considered to be permanent accounts meaningthat the account will remain from period to period. ii. Role Forward Approach: is when people use prior data on assets and liabilities to start the next accounting period. XVI. Revenue Recognition Principlea. Revenue is only recognized when it is earned.i. To be earned means to do something to deserve itii. While you may not be immediately earning the cash, you have done the task or delivered the item which you are going to get paid for.b. Although some companies use this method for accounting purposes they still receive their payment immediately. i. EX: a cash-only ice cream man. XVII. Expense Recognition Principlea. Expenses are recognized when they are incurred.b. Once an item has been used than it has been incurred. i. You buy a 12 month insurance policy, but you are only 6 months into the term. You have only incurred 6 months of that expense.c. Sometimes cash payment for our expenses happens as soon as an expense is incurred. i. EX: paying an emergency tow truck. XVIII. Matching Principle a. Expenses are matched to revenues in the period during which the expenses were incurred to generate the revenues. b. Helps businesses recognize how much they truly expended to earn the revenue during a certain period. XIX. There are 5 types of adjustmentsa. Accrued Revenue. Think “revenue now, cash later.”b. Accrued Expenses. Think “expense now, cash later.”c. Deferred Revenue. Think “cash now, revenue later.”i. Unearned Revenued. Deferred Expenses. Think “cash now, expense later.”i. Prepaid Expensese. Depreciation. Think of this as a long-term Deferred Expense adjustment.i. Depreciation is the transfer of a portion of the asset's cost from the balance sheet to the income statement during each year of the asset's life.XX. Examples of the 5 types of Adjustments a. ACCRUED REVENUEi. You have a consulting firm and you provide clients with $1000 worth of service1. Increase accounts receivable by $10002. Increase revenue by $1000b. ACCRUED EXPENSEi. You pay your employees $3,500 per work week (M-F)ii. However, the accounting period ends on W iii. Figure out that you pay your employees $7,000 per dayiv. By W you have had them work for 3 days1. This means you have accrued $21,000 in salary expensev. Increase salaries expense by $21,000vi. Increase Salaries payable by $21,000c. DEFERRED REVENUEi. You collect $1,000 in advance for services you have not yet provided1. Unearned revenueii. By the end of the period you have completed $250 worth of the job1. Earned revenue 2. $250 increase in earned revenue3. $250 increase in cashd. DEFERRED EXPENSEi. At beginning of month, we purchase $2,400 of insurance that covers a period of 12 monthsii. The accounting period ends 6 months from this purchaseiii. Each month of insurance is costing you $200 iv. By the end of the period you have used $1,200 worth of insurance1. Increase $1,200 insurance expense 2. Decrease $1,200 cash e. INTEREST EXPENSEi. I = P x R x T1. I = interest2. P = Principal (amount borrowed)3. R= rate of interest4. T= Time borrowed for. a. X = months currently borrowed forb. Y = months in total before you pay in full c. T = X/Yii. When we sign a note (note payable), we need to adjust interest expense atthe end of each accounting periodf. DEPRECIATIONi. Increase Depreciation Expense (Expense)ii. Increase Accumulated Depreciation (Contra-Asset)iii. Accumulated Depreciation is a “contra-asset” accountiv. The amount of depreciation expense formula:1. (Asset Cost – Residual Value) / Useful Life 2. “Straight-Line” Depreciation Expense per period of Useful


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PSU ACCTG 211 - Accrual Accounting

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