ILLUSTRATION $3\mathrm{.}17$

statements

statements

It is not uncommon for

Aritzia Inc.$\text{'}$s fiscal year is not the same as the calendar year, as its financial statements are dated March $1.$ Fiscal year ends can be different for other entutues anu vury as the end of its fiscal year. This retail companies like Aritzia to use a $52-$week period, instead of exactly one year, for their fiscal year. Aritzia has chosen the Sunday closest governments use March $31$ as their year end.

usually results in a $52-$week year, but occasionally may result in an additional week, resulting in a $53-$week Because the life of a business is divided into accounting time periods, determining when to record transactions is impor still in use today. We must consider the consequence of each business transaction to example, many of Maple Leaf Sports and Entertainment's sports venues were constructed years ago, yet this year? each specific accounting period. For example, how much does the cost of the arena contribute to operations

Accrual Versus Cash Basis Accounting

There are two ways of deciding when to recognize or record revenues and expenses:

Accrual basis accounting.means that transactions and other events are recorded in the period when they occur, and not when the cash is paid or received. For example, service revenue is recognized when services are performed, rather than when the cash is received. Expenses are recognized when services $($e$.$g$.,$ salaries$)$ or goods $($e$.$g$.,$ supplies$)$ are used or consumed, rather than when the cash is paid.

Under cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid. This sounds appealing due to its simplicity; however, it often leads to misleading financial statements. If a company fails to record revenue when it has performed the service because it has not yet received the cash, the company will not match expenses with revenues and therefore profits will be misrepresented.

Consider this simple example. Suppose you own a painting company and you paint a large building during year $1.$ In year $1,$ you pay $$50,000$ cash for the cost of the paint and your employees' salaries. Assume that you bill your customer $$80,000$ at the end of year $1,$ and that you receive the cash from your customer in year $2.$

On an accrual basis, the revenue is reported during the period when the service is performed$-$year $1.$ Expenses, such as employees' salaries and the paint used, are recorded in the period in which the employees provide their services and the paint is used$-$year $1.$ Thus, your profit for year $1$ is $$30,000.$ No revenue or expense from this project is reported in year $2.$

If$,$ instead, you were reporting on a cash basis, you would report expenses of $$50,000$ in year $1$ because you paid for them in year $1.$ Revenues of $$80,000$ would be recorded in year $2$ because you received cash from the customer in year $2.$ For year $1,$ you would report a loss of $$50,000.$ For year $2,$ you would report a profit of $$80,000.$