Chapter 4: Accrual Accounting ConceptsChapter 4: Accrual Accounting Concepts- Timing Issues:o- Accrual-Basis Accounting: o Transactions recorded in the periods in which the events occur. o Revenues are recognized when services performed, even if cash was not received. o Expenses are recognized when incurred, even if cash was not paid. - Cash-Basis Accounting:o Revenues are recognized only when cash is received.o Expenses are recognized only when cash is paid.o Prohibited under generally accepted accounting principles (GAAP).- Basics of Adjusting Entries:o Ensure that the revenue recognition and expense recognition principles are followed. o Are required every time a company prepares financial statements. o Includes one income statement account and open balance sheet account.o Never include cash.- Types of Adjusting Entries: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. - 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: 2o One-time items to prop up earnings numbers. o Inflate revenue numbers in the short-run.o Improper adjusting entries.
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