Principles of Accounting: Chapter Three

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Chapter 3 begins by differentiating between concepts of economic and accounting income. Accounting income is largely driven by the measurement of transactions and events, and assigning them to the correct accounting time periods. This gives rise to a set of general principles for revenue and expense recognition. These principles are at the heart of income measurement and accrual-basis accounting.

Following the conceptual explanation of income measurement, the chapter illustrates how this is put into practice via numerous specific examples. These examples show how revenue and expense recognition principles may necessitate end-of-period accounting adjustments. Don't just memorize the examples; engage in a conceptual understanding of when, why, and how adjustments are needed to align accounting measurements with the broader goals of assessing business performance.

The chapter concludes by comparing the accrual basis and cash basis of accounting. Generally accepted accounting principles (GAAP) dictate the accrual basis, but many small businesses may nonetheless find it more cost-effective to utilize the much simpler cash basis.

Exercises

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Problems: Chapter Three

Obtain the entire Accounting Cycle Problem Workbook via the linked image at left. Our high volume production process makes this an economical option as compared to printing these files on your own printer!



Basic		Problem	Worksheet	Combined	Objective

	B-3.01				Terminology

	B-3.02				Revenue recognition principles

	B-3.03				Expense recognition principles

	B-3.04				Prepaid expenses

	B-3.05				Depreciation

	B-3.06				Unearned revenue

	B-3.07				Accrued expenses and accrued revenues

	B-3.08				Various adjustments from trial balance and other information

	B-3.09				T-account analysis and adjusting entries

	B-3.10				Cash to accrual conversion



Involved		Problem	Worksheet	Combined	Objective

	I-3.01				Income measurement terms and concepts

	I-3.02				Team-based approach to learn about income measurement

	I-3.03				Business papers and adjustments

	I-3.04				Comprehensive fact set and adjustments

	I-3.05				Evaluation of adjustment errors and corrections

	I-3.06				Balance sheet versus income statement approaches to adjustments

	I-3.07				Cash and accrual-basis

The preceding table includes links to "Basic" and "Involved" problems. Each link will download the file containing a spreadsheet for the problem and a template worksheet on which you can prepare the solution electronically. If you see a light bulb icon on a worksheet, just mouse over above the icon and a comment box will appear. The comments include useful suggestions for improving your spreadsheet skills.

Solutions to these problems may be obtained from your instructor, however you may not post or redistribute, electronically or otherwise, any such solution material. Solution material may be provided to you for your sole use only, at the discretion of your individual instructor. Violation of this policy constitutes a copyright violation. Alternative problems, with solutions, may be found under the "Exercises" tab within each chapter. Video solutions to selected problems are available to students enrolling in the online course.