Chapter 1-6 Introduction to Revenue and Expenses

Flashcards covering revenue recognition, unearned revenue, asset vs. revenue, expenses, payroll timing, prepaid assets, and related transaction treatments from the notes.

When is revenue earned for goods sold on account in June in the Craig's example?

Revenue is earned when control of the goods is transferred to the customer; in this example, June revenue is recognized in June, not July.

What accounts are affected when Craig's collects $4,000 in July from customers who bought on account in June?

Debit Cash 4,000 and Credit Accounts Receivable 4,000; revenue for the June sales was earned in June.

What is unearned revenue and when is it recognized as revenue?

Unearned revenue is a liability created when cash is received before services are provided; revenue is recognized when the services are performed.

Are revenue and assets the same type of account? How do they affect equity?

No. Revenue is an income statement account that increases retained earnings (stockholders' equity) via credits; assets are balance sheet accounts.

What is the basic entry to record an expense incurred and paid in cash?

Debit Expense; Credit Cash.

When are wages expense and liabilities recognized if employees are paid later?

Wages expense is recognized in the period services are provided (e.g., August); if not yet paid, a liability such as Wages Payable is recorded.

What is a prepaid asset, and how does it become an expense?

A prepaid asset is cash paid for a resource to be used in the future; it remains an asset until the resource is consumed, at which point it becomes an expense.

What happens when insurance is prepaid for future periods (e.g., pay for 2024 coverage that starts in 2025)?

Record as Prepaid Insurance (asset) at payment; no expense yet; when the coverage starts, recognize Insurance Expense and reduce the Prepaid Insurance asset.

What is the effect when paying an electricity bill that was previously recorded as an expense in June, but paid in July?

Cash decreases and Liabilities (Accounts Payable) decrease, since you are paying off the liability created by the bill.

How is July wages payment recorded for work performed in July?

Debit Wage Expense 3,500; Credit Cash 3,500 (expense incurred and paid in July).

What are the two items that determine net income?

Revenue and expenses; net income equals revenue minus expenses.

What does Cost of Goods Sold (COGS) represent?

COGS is the expense related to the inventory that was sold during the period.

Can cash payments occur without an expense? Give examples mentioned in the notes.

Yes. Paying debt reduces cash but is not an expense; buying assets reduces cash but may not be an expense until those assets are used.

What is the July entry when Craig's purchases $2,100 of insurance for August–November?

Debit Prepaid Insurance (asset); Credit Cash.