Accrual Accounting and the
Financial Statements
Learning Objective 1
Relate accrual accounting
and cash flows.
Entity 1 cash has
The Business Cycle
Entity 2 holds inventory Purchase of
inventory
Entity 3 has a receivable
Sale of inventory on account Collection of
the receivable
Suppose that on September 30, 2005, Vodafone receives £24 for a one-year
connection to wireless phone service.
Accrual Accounting and Cash Flows
By December 31, Vodafone has
earned the revenue for three months.
Accrual Accounting and Cash Flows
Income statement reports for year ended:
Service revenue (when earned); £24 ×
3/
12£ 6
Balance sheet reports:
Liabilities:
Unearned service revenue
(company still owes £24 ×
9/
12) £18
Statement of cash flows reports for year ended:
Collections from customers
(when cash was received) £24
December 31, 2005
The Time-Period Concept
Businesses need regular progress reports, so accountants prepare financial statements for specific periods and at regular intervals.
Monthly
Quarterly
Learning Objective 2 Apply the revenue and
matching principles.
Revenue Principle
The revenue principle governs two things:
When to record revenue and…
the amount of revenue to record.
Revenue Principle
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Disney World