# w3

Accrual-basis&#x20;

* 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?

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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

{% hint style="info" %}
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.&#x20;

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

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{% endhint %}

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 <br>

* Deferred Revenue
  * Creates a liability because customer pays first
    * Once customer utilizes services, revenue is recognised.
    * Decrease amount owed to customer (liability), recognise revenue<br>

* 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<br>
  * Eg. Accrued Expense - interest

    * Compensated when parted with money

* Accrued Revenues&#x20;
  * 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.
