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Accrual Basis:

Þ the effects of transactions and other events are recognized when they
occur (and not as cash and its equivalent is received or paid) and they
are recorded in the accounting records and reported in the financial
statements of the periods to which they relate

Þ End-of-period adjustments: help assign the financial effects of

implicit transactions to the appropriate time periods

Adjustments arise from four basic types of implicit transactions:

o Prepaid expense/Deferred expense

o Unearned revenue/Deferred revenue
o Accrued expense
o Accrued revenue
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(liability) during a given period even though no explicit transaction

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wages, interest, and income

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Example: assume a company borrowsI

€100,000 on Nov 30, 2011, and the terms of
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is 9% + as of Dec 31, 2011, the amount of interest owed is

1/12 x 0.09 x €100,000 = €750
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Depreciation:

Þ Plant assets are long-lived tangible assets, such as land, buildings,

furniture, and equipment &
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• Depreciation: is the process of allocating cost to expense for a

long-term plant asset
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Decline in usefulness
Spread the cost of the plant asset over its useful life
- Exception: Land – does not decline in usefulness
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