1 Accrual Accounting Concepts Chapter 3 A200 Survey of Accounting University of Tennessee Fall 2015 2 Ch 3 Accrual Accounting Concepts Matching Revenue 1 Amounts earned by operating a business 2 Revenue is recognized recorded in the period it is earned whether or not cash is received at the same time 3 Revenue transactions increase equity through net income Expense 1 The cost of assets used or liabilities created in the process of generating revenue 2 Expenses are recognized recorded in the period they are incurred whether or not cash is paid at the same time 3 Expense transactions decrease equity through net income 3 Ch 3 Accrual Accounting Concepts Matching 1 2 Revenue is recorded in the same period as the Expenses that helped generate the revenue When revenue is earned increase a Revenue account and a increase the asset Cash if cash is received at the same time revenue is earned no accrual no deferral no end of period adjustment needed b increase the asset Accounts Receivable if cash will be received in the future after revenue is earned this is an Accrued Revenue c decrease the liability Unearned Revenue if cash was received before revenue was earned this is a Deferred Revenue 4 Ch 3 Accrual Accounting Concepts Matching 1 Expenses are recorded in the same period as the Revenue they helped generate 2 When expense is incurred increase an Expense account and a decrease the asset Cash if cash is paid at the same time the expense is incurred no accrual no deferral no end of period adjustment needed b increase the liability Accounts Payable if cash will be paid in the future after the expense is incurred this is an Accrued Expense c decrease an asset Prepaid if cash was paid before the expense was incurred this is a Deferred Expense 5 Ch 3 Recording Transactions Transaction 1 Sperry Corporation began business on September 1 2015 by issuing capital stock to investors for 50 000 cash STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings 50 000 Cash in Financing Assets Cash 50 000 Liabilities Equity Capital Stock 50 000 6 Ch 3 Recording Transactions Transaction 2 During September Sperry Corporation purchased land for 20 000 by issuing a note payable to the seller STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Land Liabilities Note Payable 20 000 20 000 Equity 7 Ch 3 Recording Transactions Transaction 3 During September Sperry Corporation rendered services to clients for 12 000 cash STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings 12 000 Cash in Operating Assets Cash 12 000 Liabilities Equity Retained Earnings 12 000 12 000 Fees Revenue Revenue earned at the same time cash is received no accrual or deferral 8 Ch 3 Recording Transactions Transaction 4 During September Sperry Corporation rendered services to clients and billed them for 3 000 STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Accounts Receivable 3 000 Liabilities Equity Retained Earnings 3 000 Revenue earned before cash is received Accrued Revenue 3 000 Fees Revenue 9 Ch 3 Recording Transactions Transaction 5 During September Sperry received 4 500 cash in advance from Zone Company for six months rent on a vacant office in Sperry s building STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Cash 4 500 Cash in Operating 4 500 Liabilities Equity Unearned Rent Revenue 4 500 Revenue earned after cash is received Deferred Revenue 10 Ch 3 Recording Transactions Transaction 6 During September Sperry Corporation paid a 1 700 utility bill for the month STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Cash 1 700 Cash out Operating 1 700 Liabilities Equity Retained Earnings 1 700 1 700 Utilities Expense Cash paid at the same time expense is incurred no accrual or deferral 11 Ch 3 Recording Transactions Transaction 7 During September Sperry Corporation hired a cleaning company to clean its offices for the month but has not yet paid the invoice of 600 STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Liabilities Equity Accounts Payable Retained Earnings 600 600 Expense incurred before cash is paid Accrued Expense 600 Cleaning Expense 12 Ch 3 Recording Transactions Transaction 8 Sperry paid a 2 400 premium on a 1 year general business insurance policy STATEMENT OF CASH FLOWS explains the change in the asset Cash BALANCE SHEET Assets 2 400 Cash out Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Cash Prepaid Insurance 2 400 2 400 Liabilities explains the change in the equity Retained Earnings Equity Expense will be incurred after cash is paid Deferred Expense Prepaid Expense 13 Summarize account balances at the end of September before adjustments STATEMENT OF CASH FLOWS Assets Cash Accounts Receivable 0 Beg 0 0 1 50 000 F 50 000 Prepaid Insurance Land 0 20 000 12 000 O 12 000 4 3 000 0 TA 87 800 2 400 50 000 1 700 1 700 E 600 600 E 12 700 12 700 NI 4 500 600 20 000 3 000 R 3 000 0 3 000 2 400 0 1 700 7 20 000 1 700 O 62 400 0 Retained Earnings 12 000 R 6 62 400 0 Capital Stock 12 000 End Unearned Rent 4 500 2 400 Note Payable Equity 4 500 O 2 400 O Accounts Payable 5 8 Liabilities 2 3 INCOME STATEMENT AND STATEMENT OF RETAINED EARNINGS BALANCE SHEET 600 20 000 4 500 TL TSE 87 800 50 000 14 Ch 3 Accrual Accounting Concepts End of Period Adjustments At the end of the accounting period the business adjusts accounts to assure that all revenue and all expenses of the period have been recorded End of Period EOP adjustments are necessary to properly match revenue with expense because 1 Revenue can be earned before Cash is received Trans 4 Accrued Revenue 2 Revenue can be earned after Cash is received