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Measuring Business Income:The Adjusting Process

Phân biệt cơ sở kế toán dồn tích từ cơ sở kế toán tiền mặt Áp dụng công nhận doanh thu và các nguyên tắc phù hợp Thực hiện mục điều chỉnh, Chuẩn bị một sự cân bằng thử nghiệm điều chỉnh, Chuẩn bị báo cáo tài chính từ sự cân bằng thử nghiệm điều chỉnh , | Measuring Business Income: The Adjusting Process Chapter 3 Distinguish accrual accounting from cash-basis accounting. Objective 1 Accrual-basis: Transactions are recorded when revenues are earned or expenses are incurred. Cash-basis: Transactions are recorded when cash is paid or cash is received. The Two Bases of Accounting: Accrual Versus Cash Example In January 2002, Prensa Insurance sells a three-year health insurance policy to a business client. The contract specifies that the client had to pay $150,000 in advance. Yearly expenses amount to $20,000. What is the income or loss? Accrual Versus Cash Example Accrual-Basis Accounting 2002 2003 2004 (000 omitted) Revenues $50 $50 $50 Expenses 20 20 20 Net income (loss) $30 $30 $30 Accrual Versus Cash Example Cash-Basis Accounting 2002 2003 2004 (000 omitted) Cash inflows $150 $ 0 $ 0 Cash outflows 20 20 20 Net income (loss) $130 ($20) ($20) Managers adopt an artificial period of time to evaluate performance. Accounting Period Monthly . | Measuring Business Income: The Adjusting Process Chapter 3 Distinguish accrual accounting from cash-basis accounting. Objective 1 Accrual-basis: Transactions are recorded when revenues are earned or expenses are incurred. Cash-basis: Transactions are recorded when cash is paid or cash is received. The Two Bases of Accounting: Accrual Versus Cash Example In January 2002, Prensa Insurance sells a three-year health insurance policy to a business client. The contract specifies that the client had to pay $150,000 in advance. Yearly expenses amount to $20,000. What is the income or loss? Accrual Versus Cash Example Accrual-Basis Accounting 2002 2003 2004 (000 omitted) Revenues $50 $50 $50 Expenses 20 20 20 Net income (loss) $30 $30 $30 Accrual Versus Cash Example Cash-Basis Accounting 2002 2003 2004 (000 omitted) Cash inflows $150 $ 0 $ 0 Cash outflows 20 20 20 Net income (loss) $130 ($20) ($20) Managers adopt an artificial period of time to evaluate performance. Accounting Period Monthly Quarterly Semi-annually Interim Period Statements Apply the revenue and matching principles. Objective 2 Revenue Principle When is revenue recognized? When it is deemed earned. Recognition of revenue and cash receipts do not necessarily occur at the same time. The Matching Principle What is the matching principle? It is the basis for recording expenses. Expenses are the costs of assets and the increase in liabilities incurred in the earning of revenues. Expenses are recognized when the benefit from the expense is received. Matching Expenses with Revenues Example Parker Floor sells a wood floor for $15,000 on the last day of May. The wood was purchased from the manufacturer for $8,000 in March of the same year. The floor is installed in June. When is income recognized? Revenues $15,000 Cost of goods sold 8,000 Net income $ 7,000 May Matching Expenses with Revenues Example Interacts with the revenue principle and the matching principle Requires that income be measured accurately each .