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When accruals are used, events are recognized before the associated cash is paid or collected. Deferral is the recognition of revenue or expenses in a period after the cash consequences are realized, i. If cash is collected in advance for services, the revenue is recognized when the services are rendered.

The issue of common stock, which is capital acquired from owners, increases business assets usually cash and equity common stock. The recognition of revenue on account increases the corresponding revenue account on the income statement, but does not affect the statement of cash flows.

The cash flow statement is affected when the account is collected. Revenue is recognized under accrual accounting when a revenueproducing event occurs, i. The collection of cash for accounts receivable is an asset exchange transaction. Only the asset side of the accounting equation is affected because one asset account increases cash , and another asset account decreases accounts receivable.

Total assets are unchanged. If cash is collected in advance for services, a liability is created unearned revenue , increasing the claims side of the accounting equation. A claims exchange transaction is one where the claims of creditors liabilities increase and the claims of stockholders retained earnings decrease, or vice versa.

The total amount of claims is unchanged. Cash payments to creditors are asset use transactions. These transactions result in the reduction of an asset account cash and the reduction of the corresponding liability account payables.

Expenses are recognized under accrual accounting at the time the expense is incurred or resources are consumed, regardless of when cash payment is made. Net cash flows from operations on the cash flow statement may be different from net income because of the application of accrual accounting. Revenues and expenses reported on the income statement may be recognized before or after the actual collection or payment of cash that is reported on the cash flow statement.

The income statement reflects the change in net assets associated with operating a business, as shown by revenues and expenses.

Expenses may result from a decrease in assets or an increase in liabilities. Revenues may result from an increase in assets or a decrease in liabilities.

A cost can be either an asset or an expense. If the item acquired has already been used in the process of earning revenue, its cost represents an expense. If the item will be used in the future to generate revenue, its cost represents an asset. A cost is held in the asset account until the item is used to produce revenue. When the revenue is generated, the asset is converted into an expense in order to match revenues with related expenses. Not all costs become expenses.

If the value of an asset will not expire in the revenue-generating process, the asset will not become an expense. For example, the cost of land will not become an expense because land does not depreciate. Supplies used during the accounting period are recognized in a single adjusting entry at the end of the period. The amount of supplies used is determined by subtracting the amount of supplies on hand at the end of the period from the amount of supplies that were available for use beginning supplies balance plus supplies purchased.

An expense is a decrease in assets or an increase in liabilities that occurs in the process of generating revenue. Revenue is an increase in assets or a decrease in liabilities that results from the operating activities of the business.

It provides a list of the economic resources that the enterprise has available for its operating activities and the claims to those resources. Assets are listed on the balance sheet in accordance with their respective levels of liquidity how rapidly they can be converted to cash. The statement of cash flows explains the change in cash from one accounting period to the next.

It is prepared by analyzing the cash account and summarizing where cash came from and how it was used. An adjusting entry is an entry that updates account balances prior to preparation of the financial statements.

The entry means that there is an item that needs proper measurement on the income statement and an adjustment will reflect the correct time period of earning or usage. Example: entry to recognize accrued interest revenue where the revenue has been earned but not yet collected and therefore revenue had not yet been recorded for the time period.

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