#cfa-level-1 #reading-23-financial-reporting-mechanics
In practice, complex businesses require additional accruals that require considerably more judgment. For example, there may be significant lags between a transaction and cash settlement.
In such cases, accruals can span many accounting periods (even 10–20 years!), and it is not always clear when revenue has been earned or an expense has been incurred. Considerable judgment is required to determine how to allocate/distribute amounts across periods.
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Open it(See the boxes showing the accounting treatment of Transaction 3, which refers to the originating entry, and Transaction 3a, which refers to the adjusting entry.) In other words, prepaid expenses are assets that will be subsequently expensed. <span>In practice, particularly in a valuation, one consideration is that prepaid assets typically have future value only as future operations transpire, unless they are refundable.<span><body><html>Original toplevel document
Open itved and the corresponding liability to deliver newsletters) and, subsequently, 12 future adjusting entries, the first one of which was illustrated as Transaction 12. Each adjusting entry reduces the liability and records revenue.
<span>In practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue.
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