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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Accrual Accounting

GAAP requires the use of accruals and deferrals in the determination of income.

Required:

  1. 1. Explain how accrual accounting affects the determination of a company’s income. Include in your discussion what constitutes accrued and deferred revenues and expenses, and give appropriate examples of each.
  2. 2. Contrast accrual accounting with cash accounting.

1.

To determine

Describe the manner in which the accrual accounting affects the determination of the income of a company and state the manner in which the accrued and deferred revenues and expenses are established and provided examples.

Explanation

Describe the manner in which the accrual accounting affects the determination of the income of a company and state the manner in which the accrued and deferred revenues and expenses are established and provided examples as follows:

Accrual accounting:

The method of accounting which recognizes revenues before they are received, and recognizes expenses before they are paid, is referred to as accrual accounting. Under the accrual accounting, the effects of the transactions and other events are recognized and reported on the assets and liabilities of a company in the time periods to which they relate rather than only when cash is received or paid. Expenses are recognized and recorded as follows:

  1. Associating cause and effect.
  2. Systematic and rational allocation.
  3. Immediate Recognition.
  • Associating cause and effect:
  • In associating cause and effect, some of the expenses are recognized and recorded on a basis of direct association with specific revenue. Some transactions result in both revenue and expenses. Examples: Sales commissions and cost of goods sold.

  • Systematic and rational allocation:
  • In systematic and rational allocation, some of the expenses are recognized during a particular accounting period in which benefits are provided. There are many assets that provide benefits for several periods. From each of these assets, a percentage of the cost is rationally recognized as an expense each period. The allocation system should be based on the consumption of the resource and the expected service life. Examples: Amortization of intangible assets, Depreciation of fixed assets, and the allocation of prepaid costs.

  • Immediate Recognition:
  • Under immediate recognition, some of the costs are recognized as expenses in the current accounting period. ¬†Because these costs provide no probable future benefits. Examples: research and development expenses and advertising expenses.

    State the manner in which the accrued and deferred revenues and expenses are established, and provided examples as follows:

    The term accrual signifies a transaction that affects the determination of an assets, liabilities, and income for the period of a company, however has not yet been reflected in its cash accounts of that period...

    2.

    To determine

    Differentiate accrual accounting and cash accounting.

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