1. Accounting & Financial Reporting BUSG 503 Michael Dimond

2. Michael Dimond School of Business Administration Recognition and Measurement in F/S Recognition: Recording of an item (asset, liability, etc) Measurement: requires two choices to be made Choice 1: The attribute to be measured Historical cost Current value Choice 2: The unit of measure—yardstick Money

3. Michael Dimond School of Business Administration Cash and Accrual Bases of Accounting Cash basis: revenues are recognized when cash is received and expenses are recognized when cash is paid Accrual basis: revenues are recognized when earned and expenses are recognized when incurred

4. Michael Dimond School of Business Administration The Revenue Recognition Principle Revenue Recognition Recognized in the income statement when they are realized, or realizable, and earned Delivering or producing goods Rendering services Conducting other activities Matching Principle: Associates revenue of a period with costs necessary to generate that revenue Direct matching: associate revenues of a period with their costs Indirect matching: associate costs with a particular period Example: depreciation on building Expenses incurred in two different ways: From the use of an asset From the recognition of a liability LO 3

5. Michael Dimond School of Business Administration Matching Costs with Revenue

6. Michael Dimond School of Business Administration Adjusting Entries Made at the end of an accounting period internal transactions and do not affect the Cash account Adjustment of either an asset or a liability with a corresponding change in revenue or expense Types of adjusting entries: Deferred expense Deferred revenue Accrued liability Accrued asset LO 5

7. Michael Dimond School of Business Administration Deferred Expense Cash paid before expense is incurred Example: Prepaid rent Prepaid insurance Office supplies Property and equipment Unexpired costs are assets Written off and replaced with an expense as the costs expire

8. Michael Dimond School of Business Administration Adjusting a Deferred Expense Account

9. Michael Dimond School of Business Administration Deferred Revenue Cash received before revenue is earned Example: Insurance collected in advance Subscriptions collected in advance Gift certificates Initially recorded as liabilities (unearned or refundable receipts) and recorded as revenues in future periods when earned

10. Michael Dimond School of Business Administration Adjusting a Deferred Revenue Account

11. Michael Dimond School of Business Administration Accrued Liability Cash is paid after an expense is actually incurred rather than before its incurrence Examples: Payroll Taxes Utilities

12. Michael Dimond School of Business Administration Recording an Accrued Liability (Wages)

13. Michael Dimond School of Business Administration Accrued Asset Revenue earned before the receipt of cash Example: Rent and interest are earned with the passage of time and require an adjustment if cash has not yet been received Whenever a company records revenue before cash is received, receivable is increased and revenue is also increased

14. Michael Dimond School of Business Administration Recording an Accrued Asset 30 adjustment to recognize insurance expense:

15. Michael Dimond School of Business Administration Accruals and Deferrals 30 adjustment to recognize insurance expense:

16. Michael Dimond School of Business Administration The Accounting Cycle 30 adjustment to recognize insurance expense: Series of steps performed each period and culminating with the preparation of a set of financial statements LO 6

17. Michael Dimond School of Business Administration Closing Process All revenue accounts is credited to Income Summary—single entry is made All expense accounts is credited to Income Summary—single entry is made Credit balance in the Income Summary account is transferred to Retained Earnings A credit is made to close the Dividends account with an offsetting debit to Retained Earnings Interim financial statements prepared monthly, quarterly or at other intervals less than a year in duration Prepared for internal use