Lecture 4 - 08.30.23 Chapter 3 -Cash Basis vs. Accrual Basis oCash Basis: When cash changes hands, revenue is recognized. oAccrual Basis: Revenues: Value received for goods sold or services performed. Revenue recognition principle: oRevenue is recognized when earned,not received. oThe goods were delivered, or the services were performed. oEx. Ingredion: Revenue was recognized when a sales agreement was in place,delivery occurred, price is fixed or determined, and collection is reasonably assured. United Airlines: The company records revenue once the transportation service is provided. (Once the service has been provided). Expenses: Payments or obligations for goods or services received. The matching principle: oCosts are recorded as expenses in the same time period as the related revenues: Ex: Home Depot buys stock in Dec 2023. Sells in 2024. When do they recognize this cost? Recognized once revenue is recognized, so it is recognized in the 2024 income statement even though they bought it in 2023. oCosts that cannot be matched with related revenues are matched with time periods that benefit from the cost. Ex: Insurance expense done in 2023: It is split between 23/24 since it benefits both years. All of this begins as an asset, and gradually turns into an expense as insurance expires. -Adjusting Entries: oJournal entries (+ledger postings) made at year end (whenever financial statements are made) to allocate revenue + expenses between the current year + future years. oEach entry will have one income statement account and one balance sheet account. oYou will never see: Cash in an adjusting entry
o4 types of adjusting entries: Accrued revenues (Revenues in the balance sheet): Examples: oSales Revenue oService Revenue oRent Revenue oInterest Revenue Accrued expenses (Expenses in the balance sheet): Examples: oSalary Expense oUtility Expense oInsurance Expense oInterest Expense Deferred revenues (Liabilities In the balance sheet): Examples: oUnearned Subscription Revenue oUnearned Rent Revenue Deferred expenses (Assets in the balance sheet): Examples: oPrepaid Insurance oSupplies oEquipment Accrued & Deferral definitions: Accrual - revenue or expense is recognized, but no exchange of cash yet. Deferral - Cash is exchanged, but no recognition of revenue or expense yet.