Unit 1 Topic 2

• Cash accounting


  Recognises the effects of the transaction when cash is received or paid out
• Accrual accounting


  Recognises transactions and events when they have an economic impact on the entity rather than when the associated cash flows occur
• Assets, liabilities, revenues and expenses arising from a transactions or other events will be recognised in the financial statement of an entity when the effects occur rather than when amounts are received or paid
• Cash basis accounting does not recognize income until it has been received or expense until it has been paid.
• Accrual accounting is used to match revenues and expenses, while cash basis accounting matches them when money changes hands.
• The accruals concept recognizes revenue as soon as goods or services are provided to customers, regardless of whether payment has been received.
• Expenses are recognized at the time that goods or services are used up or consumed by the business, even if payments have not yet been made.
• Revenue recognition occurs when goods or services are delivered or performed, regardless of whether payment has been received.
• Accounting period concept


  The life of a business is divided into arbitrary time periods
• Applying the accounting period concept

  1. Businesses wish to know how the business is progressing on a more regular basis

  2. Accountants aim to calculate a profit figure for each accounting period that is as accurate as possible

  3. Accountants aim to determine a financial position that is as accurate as possible at the end of that accounting period
• Accounting period in Australia

  • 1 July - 30 June
• Earning of revenue


  1. Drop phone off to service agent

  2. Agent fixes phone

  3. Agent calls to say phone is ready

  4. Customer collects phone and pays
• Revenue should be recognised in the accounting period in which the service is performed