w3

Accrual-basis

• Part of IFRS

• We match the expense costs to the revenue generated

• Measuring business activities

  • Can answer how much business activity the company undertook during the period?

Cash-basis

• Recognition of Revenue and Expensive is when we receive and pay cash

• Amount of cash does not give a clear cut on what business activities has happened

Company's performance is better linked to Accrual-Basis? What do we actually value in the market? (Business Valuation) -> We are trying to measure business activities/performance.

-> How does one see value created? Its actually through business activities, and cash is just one aspect of it

Difference between AB and CB is timing! ⇒ Point of Adjusting

Adjusting Entries

• Needed when timing difference between service provision and cash settlement

• Prepaid Expense:

  • Pay in advance ⇒ Creates an asset because we pay for something that we can get benefit from in the future

    • Decrease asset + Recognize Expense

• Deferred Revenue

  • Creates a liability because customer pays first

    • Once customer utilizes services, revenue is recognised.

    • Decrease amount owed to customer (liability), recognise revenue

• Depreciable Assets:

  • Equipment after use has its asset value decreases.

  • Depreciation Expense + Accumulated Depreciation (Cost of the time use)

• Accrued Expense

  • Record Liability to be paid

  • Recognise cost as an expense + record liability

  • Eg. Accrued Expense - interest

    • Compensated when parted with money

• Accrued Revenues

  • Provided service without billing

  • Recognizing revenue + record asset (rights to claim on customer)

Opening/Closing Retained Earnings

• Amounts that are carried over for the next period.