Chapter 2 - Accounting for accruals and deferrals. In this chapter, we will learn more about the accounting cycle. After you have mastered the material in this chapter, you will be able to show how accruals affect financial statements and show how deferrals affect financial statements. | Chapter Two Accounting for Accruals and Deferrals Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin In this chapter, we will learn more about the accounting cycle. 2- Event 1: Cato Consultants was started on January 1, 2013, when it acquired $5,000 cash by issuing common stock. Asset Source Transaction Increase assets (Cash). Increase stockholders’ equity (Common Stock). Part II Event 1: Cato Consultants acquired five thousand dollars cash by issuing common stock. Part III Here is the effect of this transaction on the financial statements model. Both cash, an asset, and stockholders’ equity increase by five thousand dollars. Part IV This is considered to be an asset source transaction. 2- Event 2: During 2013, Cato Consultants provided $84,000 of consulting services to its clients but no cash has been collected. Increase assets (accounts receivable). Increase stockholders’ equity (retained earnings). Asset Source Transaction Part I Event two: During 2013, Cato Consultants provided eighty four thousand dollars of consulting services to its clients but no cash has been collected. This type of transaction is frequently referred to as providing services on account. Part II This transaction increases the accounts receivable asset account and, because of revenue, increases the retained earnings stockholders’ equity account. It is classified as an asset source transaction. Accrual accounting requires companies to recognize revenue in the period in which the work is done regardless of when cash is collected. Part III Here is the effect of this transaction on the financial statements model. Notice that the event affects the balance sheet and the income statement but not the statement of cash flows since cash was not collected as part of this transaction. 2- Event 3: Cato collected $60,000 cash from customers in partial settlement of its accounts receivable. Increase assets (cash). Decrease assets (accounts . | Chapter Two Accounting for Accruals and Deferrals Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin In this chapter, we will learn more about the accounting cycle. 2- Event 1: Cato Consultants was started on January 1, 2013, when it acquired $5,000 cash by issuing common stock. Asset Source Transaction Increase assets (Cash). Increase stockholders’ equity (Common Stock). Part II Event 1: Cato Consultants acquired five thousand dollars cash by issuing common stock. Part III Here is the effect of this transaction on the financial statements model. Both cash, an asset, and stockholders’ equity increase by five thousand dollars. Part IV This is considered to be an asset source transaction. 2- Event 2: During 2013, Cato Consultants provided $84,000 of consulting services to its clients but no cash has been collected. Increase assets (accounts receivable). Increase stockholders’ equity (retained earnings). Asset Source Transaction
