Week 3 F:3.1 - What is the Difference Between Cash Basis Accounting

School: Monterey Peninsula College - Course: BUSINESS 1A - Subject: Accounting

F:3.1 - What is the Difference Between Cash Basis Accounting and Accrual Basis Accounting -Cash basis accounting = records only transactions with cash, cash receipts and cash payments -Easier accounting method to follow -Requires less knowledge of accounting concepts and principles -Accrual basis accounting = records effect of each transaction as it occurs -Revenues recorded when earned and expenses recorded when incurred -Revenues earned when services or goods are provided to customer F:3.2 - What Concepts and Principles Apply to Accrual basis Accounting -Time period concept = assumes that a businesses activities can be silenced into small time segments and that financial statements can be prepared for specific periods, month, quarter, year -Fiscal year = 12 month accounting period used for annual financial statements F:3.2.2 - The Revenue Recognition Principle -Revenue recognition principle = tells accountants when to record revenue and requires companies to follow five step process 1.Identify contract with customer -Contract is an agreement between two or more parties that creates enforceable rights and obligations 2.Identify performance obligations in contract -Performance obligation = contractual promise with a customer to transfer distinct good or service -Contract might have multiple performance obligations 3.Determine transaction price -Transaction price = amount that the entity expects to be entitled to as a result of transferring goods or services to customer 4.Allocate transaction price to the performance obligations in the contract -If transaction has multiple performance obligations, transaction price will need to be allocated among difference performance obligations 5.Recognize revenue when the entity satisfies each performance obligation -Business will recognize revenue when it satisfies each performance obligation by transferring good or service to customer -Good or service is considered transferred when customer contains control of good or service F:3.2.3 - The Matching Principle -Matching principle = guides accounting for expenses and ensures: -All expenses are recorded when they are incurred during the period -Expenses are matched against revenues of the period -To match expenses against revenues = subtract expenses incurred during one month from revenues earned during that same month (Equation) -Natural link between some expenses and revenues F:3.3 - What are Adjusting Entries and How do we Record Them -End of period process begins with trial balance -Unadjusted trial balance = lists revenues and expenses of company -Amounts are incomplete because they omit various revenue and expense transactions -Accrual basis accounting requires business to review unadjusted trial balance and determine whether any additional revenues and expenses need to be recorded -Adjusting entry = completed at end of accounting period -Records revenues to the period in which they are earned and expenses to the period in which they occur -Update asset and liability accounts -Needed to measure net income (loss) on income statement and assets and liabilities on balance sheet