VISUAL #3-1
ACCRUAL BASIS ACCOUNTING
(Follows GAAP)
Requires that the
Income Statement
(for a period)
report
ALL REVENUES EARNED in period (Collected or Not)
Minus ALL EXPENSES INCURRED in period (Paid or Not)
Equals Net Income or Net Loss for the period
ACCOUNTS MUST BE ADJUSTED TO FOLLOW PRINCIPLES
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GAAP
Revenue
Recognition
GAAP
Periodicity
GAAP
Expense
Recognition
(or Matching)
GAAP
Expense
Recognition
or Matching
Education.
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VISUAL #3-2
DEFERRALS
The converse of statements in Visual #3-1 also applies.
Revenue not earned or expense not incurred results in Deferrals*
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Education.
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VISUAL #3-3
1A. Prepaid (deferred)
expenses—initially recorded as
assets
Dr. _________ Expense
Cr. the Asset* acct.
Amount used, or
consumed, or expired
1B. Prepaid (deferred)
expenses—that are depreciable
(plant assets)
Dr. Depreciation Expense
Cr. Accumulated
Depreciation
Portion of cost
allocated to this period
as depreciation
1C. Prepaid (deferred)
Dr. the Asset** acct.
Amount left, or
2A. Unearned revenues—
(revenue received in advance)
initially record as liability
(unearned account)
Dr. Unearned ________
Cr. the Revenue** acct. Amount earned to date
2B. Unearned revenues—
(revenue received in advance)
initially recorded as a revenue
(alternate treatment—
appendix)
Dr. the Revenue** acct.
Cr. Unearned________
Amount still not
earned
3. Accrued expenses—
(expenses incurred but not yet
recorded)
Dr. _________ Expense
Cr. _________ Payable
Amount accrued
4. Accrued revenues
(revenues earned but not
Dr. ________ Receivable
Cr. the Revenue** acct.
Amount accrued
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Education.
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Alternate Demonstration Problem #1
Chapter Three
On July 1, 2015, Howard M. Tenant, Inc., rents office space from John Q.
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Solution: Alternate Demonstration Problem #1
Chapter 3
Tenant Landlord
7/1/15
Prepaid Rent……………. 2,400 Cash...…………………….. 2,400
Cash 2,400 Unearned Rent
Rev..……………….. 2,400
An Alternative Solution (Based on the Appendix)
Tenant Landlord
7/1/15
Rent Expense.............. 2,400 Cash…………..………..…. 2,400
Cash…………………. 2,400 Rent Rev….……..... 2,400
12/31/15
Prepaid Rent ………...... 1,800 Rent Rev. 1,800
Rent Expense….... 1,800 Unearned Rent
Revenue............. 1,800
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Alternate Demonstration Problem #2
Chapter Three
The trial balance of Large Company, Inc., at the end of its annual accounting period is as follows:
LARGE COMPANY, INC.
Trial Balance
December 31, 2015
Cash………………………………….………………………….... $ 4,000
Accounts Receivable……………………………….. 400
Prepaid Insurance…………………..…………..….…….… 1,200
Supplies ……………………………….……..….….…….…... 2,100
Equipment ……………..…………………………………….… 20,000
Accumulated Depreciation—Equipment…………… $ 2,000
Additional information:
1. Expired insurance, $400.
Solution: Alternate Demonstration Problem #2
Chapter 3
1. Insurance Expense…..……..……..……..…………... 400
Prepaid Insurance…….…….……..………..…… 400
Supplies Expense…..……..…….……..……………... 1,300
Supplies…..…….……..……..…….…………..…… 1,300
$2,100 – 800 inventory = 1,300 supplies used
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