accounting CH4.pdf

? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 4 Revenues and Monetary Assets ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter Objectives Accounting period Accrual basis accounting Three more accounting concepts —the conservatism concept; —the materiality concept; —the realization concept; Revenue measurement; Monetary assets ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ? (Assumption) An organization’s activities can be divided into specific time periods such as a month, a quarter, a semi-annual, or a year. ? Most organizations use a year as their primary accounting period and adopt a fiscal year 1. The Accounting Period ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 Annually 1 2 Monthly Quarterly Semiannually Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin When we divide business activities into arbitrary fixed periods of time, it is often necessary to have special accounting for transactions that cross from one time period to the next. 2. Accrual Basis Accounting ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Accounting Accrual Basis vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Accrual Basis vs. Cash Basis Example: FastForward paid $2,400 for a 24-month insurance policy beginning December 1, 2009. On the cash basis the entire $2,400 would be recognized as No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy. insurance expense in 2009. ? The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cash Basis Jan Feb Mar Apr