Learning objectives
After completing this unit, you will be able to:
- Contrast cash basis and accrual basis reporting
- Apply revenue recognition timing under ASC 606 (manager-level)
- Match expenses to revenues and periods
- Post standard adjusting entries at month-end and year-end
- Close temporary accounts to retained earnings
Why this matters
A profitable month on the income statement can still be a cash crisis. Accrual accounting assigns performance to the right period so investors and lenders compare companies on the same timing rules. Unit 3 is where "when" gets as important as "how much."
Unit overview
| # | Lesson | Core idea |
|---|---|---|
| 1 | Cash Accounting versus Accrual Accounting | Bank timing versus earned/incurred timing |
| 2 | Revenue Recognition | Bookings, billings, cash, and GAAP revenue |
| 3 | Expense Recognition and Matching | COGS, prepaids, accruals, depreciation |
| 4 | Adjusting Entries | Prepaids, accruals, unearned revenue, depreciation |
| 5 | Closing the Books | Full cycle from transactions to closed RE |
Connection to applied work
For your Financial Accounting portfolio artifact, document one real or fictional quarter where accrual net income and operating cash diverge. Tie the gap to deferred revenue, AR, inventory, or accrued expenses.
Practice
- Customer prepays $12,000 for annual service. Show cash-basis versus accrual January entries.
- List the four classic adjusting entry types with one example each.
- Walk through why closing entries zero revenue and expense accounts.
Knowledge check
- Why do public companies report on accrual basis?
- When is deferred revenue a liability, not revenue?
- What is the matching principle in plain language?
- What happens to retained earnings at year-end close?
Key takeaways
- Cash and accrual answer different questions; both matter.
- Adjusting entries align the ledger before statements.
- Closing resets temporary accounts for the next period.
- Unit 4 deepens major balance sheet accounts you adjust here.
Unit assessment
Complete each section below. Score 80%+ on the quiz to finish this unit's assessment.
Exercises
Apply what you learned in this unit with structured practice.
Deliverable
300–500 word analysis document saved to your portfolio under ACC 101.
Rubric
- • Framework applied correctly (not just named)
- • Specific evidence from a real example
- • Clear recommendation with tradeoffs acknowledged
- • Professional writing with source citation
Deliverable
Problem solutions + 150-word reflection in your ACC 101 workbook.
Rubric
- • Attempted all practice items before checking answers
- • Honest reflection on errors
- • Identifies a specific review action
Model / spreadsheet
Build or extend a spreadsheet model tied to this unit.
Deliverable
Spreadsheet file with Inputs / Model / Outputs tabs · One-paragraph summary of key insight from the model · Screenshot or export saved to portfolio
Rubric
- • Assumptions stated explicitly
- • Logic is auditable (formulas or steps visible)
- • Output answers a specific business question
- • Sensitivity or scenario considered
Knowledge quiz
Check your understanding before marking the unit complete.
1. Under accrual accounting, revenue is recorded when:
2. Nimbus Cloud collects $360,000 upfront for a three-year SaaS contract ($10,000/month). How much revenue is recognized in the first month?
3. The matching principle requires that:
4. On January 31, employees earned $8,000 in wages that will be paid February 5. The January 31 adjusting entry is:
5. Six months of insurance was prepaid for $6,000 on January 1. After one month, the adjusting entry is:
6. A company has $50,000 of unearned rent at month start and earns $5,000 of it during the month. The adjustment is:
7. Monthly straight-line depreciation on equipment is recorded with:
8. Closing entries at period end primarily: