ACG 2021 ACG2021 StudyGuide – Chapter 4 – Everest College

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ACG 2021 ACG2021 StudyGuide – Chapter 4 – Everest College

Chapter 4

Income Measurement and Accrual Accounting

After studying this chapter, students should be able to:

Explain the significance of recognition and measurement in the preparation and use of financial statements (Module 1–LO1).

Explain the differences between the cash and accrual bases of accounting (Module 1–LO2).

Describe the revenue recognition principle and explain its application in varioussituations (Module 1–LO3).

Describe the matching principle and the various methods for recognizing expenses(Module 1–LO4).

Identify the four major types of adjusting entries and prepare them for a variety ofsituations (Module 2–LO5).

Explain the steps in the accounting cycle and the significance of each step (Module 3–LO6).

Explain why and how closing entries are made at the end of an accounting period(Module 3–LO7).

Understand how to use a work sheet as a basis for preparing financial statements(Appendix) (Module 4–LO8).

MODULE 1 ACCRUAL ACCOUNTING PRINCIPLES Module 1LO 1

Accrual Accounting Principles

Recognition

Accountants and managers need to know (1) what economic events should be communicated orrecognizedin the financial statements, and (2) how the effects of these transactions bemeasured in the statements.

Recognitionis the process of formally recording or incorporating an item in thefinancial statements of an entity as an asset, liability, revenue, expense or the like.

Financial statements are a form of communication between the entity andexternal users.

External users have limited access to relevant information about a company.

T hey depend on the financial statements that management issues to providethe necessary information to make decisions.

Accountants have a moral and ethical responsibility to provide users withfinancial information that will be useful in making their decisions.

Includes depiction of an item in both words and numbers, with the amount included inthe totals of the financial statements.

It is the process by which the accountant depicts or describes the effects of economicevents on the entity.

Assets, liabilities, revenues, and expenses depicted in financial statements arerepresentations.

A depiction of the real thing since accountant can’t showthe external user thecompany’s assets, etc.

Measurement

Quantification of the economic effects on an entity.

Measurement of an item in the financial statements requires that two decisions bemade:

T he attribute to be measured.

T he unit of measure to be used

Attribute to be measured: what characteristic of the property should be used to measure and recognize the item on the financial statements.

Cost is the amount of cash or itsequivalent paid to acquire the asset. How do we report the asset on a later balance sheet?

Historical cost

Historical cost is the amount paid for an asset and used as a basis for

ACG 2021 ACG2021 StudyGuide – Chapter 4 – Everest College

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