ch04 income measurement and accrual accounting

8/10/2019 Ch04 Income Measurement and Accrual Accounting

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Notes:Chapter 4 Income Measurement And Accrual Accounting

4-1

South-Western

Recognition:formally

recordinganiteminthe

financialstatementsof

anentity

RecognitionandMeasurement

IknowI

needto

record

this...

Measurement:

quantificationofthe

economiceffects

of

theitemontheentity

...butat

currentvalue

orhistorical

cost?

LO1

Cashvs.AccrualBasis

Cashbasis:revenuesandexpensesare

recordedonlywhencashisreceivedorpaid

Accrualbasis: revenuesarerecognizedwhen

earned;expenses

are

recognized

when

incurred

LO2


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Cashbasis

statement

Accrualbasis

statement

Statementof

CashFlows

Cashflows from

operatingactivities:

$(4,000)

Income

Statement

Netincome:

$7,000

Whataccountsfor

thedifference?

RevenueRecognitionPrinciple

Exceptions:

Longtermcontracts

Franchises

Commodities

Installmentsales

Rentandinterest

Revenueisrecognizedwhenrealizedand

earnedusuallyattimeofsale

LO3


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MatchingPrinciple

Directly

e.g.,Inventory e.g.,Buildings e.g.,Utilities

Matchexpenseswithassociatedrevenues

Indirectlyover

periodthey

providebenefits

Simultaneously

upontheir

acquisition

LO4

ExpenseRecognition

IncomeStatement

PP&E

Intangibles

asused

BalanceSheet

whensold

overperiodtheyprovidebenefits

ASSETS: EXPENSES:

Costofgoodssold

Suppliesexpense

Insuranceexpense

Rentexpense

Depreciationexpense

AmortizationexpenseOtherexpenses

(asincurred)

Inventory

Supplies

Prepaidassets

l


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TypesofAdjustingEntries

RECOGNIZE

REVENUEOR

EXPENSES

BEFOREORAFTER

CASHIS

EXCHANGED

Deferred

expense

Accrued

liability

Accrued

asset

Deferred

revenue

LO5

DeferredExpense

Cashpaidbeforeexpenseisincurred

Examples:

Prepaidrent

Prepaidinsurance

Officesupplies

Propertyand

equipment

Costsareinitiallyrecordedasassetsand

allocatedtoexpensesinfutureperiods


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PrepayrentonofficespaceforoneyearonSeptember1

Initialjournalentry:

9/1 PrepaidInsurance 2,400

Cash 2,400

Monthlyadjustingjournalentry:

9/30 InsuranceExpense 200

Prepaid

Insurance 200($2,400annual1/12=$200permonthfor12months)

DeferredExpense

Example

#1

DeferredExpense

Example

#2


1/1 Storefixtures 5,000

Cash 5,000

Monthlyadjusting

journal

entry:

1/31 DepreciationExpense 75

AccumulatedDepreciation 75

($5,000 $500)1/60=$75permonthfor60months)

PurchasenewstorefixturesonJanuary1for$5,000.

Estimatedusefullifeis5years(60months);estimated

salvagevalueis$500


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DeferredRevenueCashreceivedbeforerevenueisearned

Examples:

Insurancecollectedinadvance

Subscriptionscollectedinadvance

Giftcertificates

Receiptsareinitiallyrecordedasliabilities

(unearnedorrefundablereceipts)andrecordedas

revenuesin

future

periods

when

earned

DeferredRevenueExampleReceived$2,400foraninsurancepolicyinadvanceon

September1


9/1 Cash 2,400

InsuranceCollectedinAdvance 2,400

Monthly

adjusting

journal

entry:9/30 InsuranceCollectedinAdvance 200

InsuranceRevenue 200

($2,400annual1/12=$200permonthfor12months)


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AccruedLiability

Expenseincurred

before

cash

is

paid

Examples:

Payroll

Taxes

Interest

Recordexpense(andcorresponding

liability)inperiodincurred;payforitina

futureperiod

Nocashflowonrecording,onlywhenpaid

AccruedLiability

Example

#1

Atendofmonth,betweenpayperiods:

WagesExpense 40,000

WagesPayable 40,000

Nextpayday:

WagesPayable 40,000

WagesExpense 240,000

Cash 280,000

Paybiweeklywagesof$280,000


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AccruedLiabilityExample#2


3/1 Cash 20,000NotesPayable 20,000

Monthlyadjustingjournalentry:

3/31 InterestExpense 150

InterestPayable 150

($20,000principal

9%

3/12

=$450

for

3

monthsor$450/3=$150permonth)

OnMarch

1,

assume

a9%,

90

day,

$20,000

loanistakenoutwithabank

AccruedLiabilityExample#2(continued)

5/30 InterestPayable 300InterestExpense 150NotesPayable 20,000

Cash 20,450

Torecordpaymentofa9%,90day,$20,000loanwith

interestdueonMay30


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AccruedAssetRevenue

earned

before

cash

is

received

Examples:

Rent

Interest

Recordrevenue(andcorresponding

receivable)inperiodearned;receivepayment

inafuture

period

AccruedAsset

Example

Firstdayofthemonth:

RentReceivable 2,500

RentRevenue 2,500

Uponreceipt

of

cash:

Cash 2,500

RentReceivable 2,500

Rentpaymentof$2,500duewithinfirst10

daysofmonth


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AdjustingEntrySummary

Examples: DeferredExpense

cashreceivedbeforeexpenseisincurred

DeferredRevenue

cashreceivedbeforerevenueisearned

AccruedLiability

expenseincurredbeforecashispaid

AccruedAsset

revenueisearnedbeforecashisreceived

Stepsin

the

Accounting

Cycle

1.Collectand

analyzeinfo2.Journalize

transactions

3.Post

transactionsto

generalledger

4.Prepare

worksheet

5.Prepare

financial

statements

6.Recordand

postadjusting

entries

7.Closethe

accounts

LO6


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TheClosingProcess

Purpose:

Toreturnthebalanceofrevenue,

expense,anddividendaccountsto

zerotobeginthenextperiod

totransferthenetincomeofthe

periodtoRetainedEarnings

RevenuesNormal

balance

NominalAccounts

Expenses

Normal

balance

Dividends

Normalbalance

$XX $XX

$XX

Zeroout

nominalaccounts

tostartaccumulation

ofnextperiods

results

Closeto

Income

Summary

$XX

Closeto

Income

Summary

$XX

Closeto

Retained

Earnings

$XX

LO7


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Closing

Entries

(Netloss)ornetincome

closedtoRetainedEarnings

IncomeSummary$XX

fromrevenue

accounts

$XX

fromexpense

accounts

What Should You Understand After

Today

WhatisAccounting?

Whatarethe4financialstatements

Temporaryvs.PermanentAccounts

StockvsFlow

Howfinancialstatementsconnecttoeachother

Theaccountingcycleisaprocessthatcreatesfinancialstatements

Cashvs.AccrualAccounting

Creditshavetoequaldebits

Balance

sheet

must

always

BALANCE!!!!!!

ch04 income measurement and accrual accounting

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