After you have mastered the material in this chapter, you will be able to: Show how receivables affect financial statements, show how payables affect financial statements, show how supplies affect financial statements, show how prepaid items affect financial statements,. | Chapter Two Accounting for Accruals and Deferrals McGraw-Hill/Irwin © 2015 McGraw-Hill Education. 1 2-2 Cash Basis vs. Accrual Accounting Recognition Realization Formally recording an economic item or event in the financial statements Collecting cash, generally from the sale of products or services 2 Vertical Statements Model 2-3 3 Comparing Cash Flow from Operating Activities with Net Income 2-4 4 The Closing Process Transfers net income (or loss) and dividends to Retained Earnings. Establishes zero balances in all revenue, expense, and dividend accounts. 2-5 5 Temporary accounts track financial results for a limited period of time. Temporary and Permanent Accounts Revenues Expenses Dividends TemporaryAccounts Permanent Accounts Assets Liabilities Equity Permanent accounts track financial results from year to year. 2-6 6 Steps in an Accounting Cycle Record Transactions Adjust Accounts Prepare Statements Close Nominal Accounts 2-7 7 Matching Concept The objective of accrual accounting is to improve matching of revenues with expenses. Cash basis accounting can distort the measurement of net income because it sometimes fails to properly match revenues with expenses. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred. 2-8 8 The Conservatism Principle When faced with a recognition dilemma, conservatism guides accountants to select the alternative that produces the lowest amount of net income. 2-9 9 Preparing Financial Statements 2-10 10 Preparing Financial Statements 2-11 11 Preparing Financial Statements 2-12 12 Recap: Types of Transactions The described transactions can be classified into one of four categories: Asset use Increase assets, increase claims on assets. Increase one asset, decrease another asset. Decrease assets, decrease claims on assets. Asset source Asset exchange Claims exchange Increase one claims account, decrease another. 2-13 13 | Chapter Two Accounting for Accruals and Deferrals McGraw-Hill/Irwin © 2015 McGraw-Hill Education. 1 2-2 Cash Basis vs. Accrual Accounting Recognition Realization Formally recording an economic item or event in the financial statements Collecting cash, generally from the sale of products or services 2 Vertical Statements Model 2-3 3 Comparing Cash Flow from Operating Activities with Net Income 2-4 4 The Closing Process Transfers net income (or loss) and dividends to Retained Earnings. Establishes zero balances in all revenue, expense, and dividend accounts. 2-5 5 Temporary accounts track financial results for a limited period of time. Temporary and Permanent Accounts Revenues Expenses Dividends TemporaryAccounts Permanent Accounts Assets Liabilities Equity Permanent accounts track financial results from year to year. 2-6 6 Steps in an Accounting Cycle Record Transactions Adjust Accounts Prepare Statements Close Nominal Accounts 2-7 7 Matching Concept The objective of accrual .
