Accounting Chapters 3 and 4

when revenue is earned, usually ________________ increases

cash and accounts recievable

Any revenues, expenses, gains, or losses that result from these other activities are not included as part of _________________ but are instead categorized as ____________

income from operations; Other Items

Other Items include the following:

• Interest Revenue (also Investment Revenue, Investment Income, or Dividend Revenue)

• Interest Expense

• Losses (Gains) on Sale of Investments

Corporations are required to disclose ___________________ on the income statement or in the notes to the financial statements.

earnings per share

EPS = ?

net income / shares

Typical Format of Income Statement

Operating Revenues

Less Operating Expenses

Income from Operations

Add/Less: Other Items

Income before Income Taxes (or Pretax Income)

Income Tax Expense (or Provision for Income Taxes)

Net Income

Earnings per Share

accrual basis accounting

revenues are recognized when goods and services are provided to customers (they are earned), and expenses are recognized in the same period as the revenues to which they relate (resources are used or debts are incurred to generate revenues), regardless of when cash is received or paid.

revenue recognition principle

record revenue when it's earned, not necessarily when cash shows up

when revenue is earned and cash is recieved at the same time…

debit cash, credit sales revenue

when revenue is earned before cash is recieved…

debit accounts recievable, credit sales revenue

when revenue is earned after cash is recieved…

debit cash, credit unearned revenue

expense recognition principle / matching principle

Record expenses when incurred in earning revenue

cash basis accounting

Record revenues when received and expenses when paid

If an expense has been incurred but not yet paid, the company records a ___________ for the amount owed.

liability

accrued expenses

Recording operating expenses that have not yet been paid or recorded to reflect expenses incurred during the period

accrued revenues

Recording revenues that have not yet been received or recorded to reflect revenue earned during the period

accrued expenses example

wages owed for December paid January 1st

accrued revenue example

Interest earned on a loan, collected later

what are the 5 steps of revenue recognition?

• contract

• promise

• price

• allocate

• recognize

what are the 4 types of accounting adjustments made at the end of an accounting period?

• prepaid expenses

• unearned revenue

• accrued expenses

• accured revenues

prepaid expenses adjusting pattern

debit expense, credit asset

unearned revenue adjusting pattern

debit unearned revenue, credit revenue

accrued expenses adjusting pattern

debit expense, credit payable

accrued revenues adjusting pattern

debit recievable, credit revenue

prepaid expenses are _______ that are used up over time and become _____________

assets; expenses

unearned revenue is a ___________ that is earned over time and becoes a ______________

liability; revenue

when expenses are incurred but not yet paid its a…

accrued expense

when revenue is earned but not yet collected its a…

accrued revenue

accrued expenses become…

payables

accrued revenues become…

recievables

Mike’s Bikes determined the end-of-year merchandise inventory to be $500. This represents the amount of the $3,000 purchase that has not been used up, to generate December sales

Dr. Cost of Goods Sold, Cr. Inventory

Mike’s Bikes had prepaid $6,000 for one year of rent (i.e., monthly rent was $500). It adjusts for the “use” of one month’s rent.

Dr. Rent Expense, Cr. Prepaid Rent (or Prepaid Asset) (to record December Rent Expense)

Mike’s Bikes purchased equipment for $15,000. The equipment is expected to have a useful life of five years, at which time is will be completely worthless. Monthly depreciation expense is computed as $15,000/60 months.

Dr. Depreciation Expense, Cr. Accumulated Depreciation – Equipment (to record one month of depreciation on the equipment)

Mike’s Bikes received a $20,000 bank loan with annual interest of six percent. The first annual interest payment is due November 30, 2021. Monthly interest expense is calculated as $20,000 x 0.06 x 1/12.

Dr. Interest Expense, Cr. Interest Payable (to record interest owed for the month of December 2020)

Mike’s Bikes delivered an order for a $200 bike on December 31. The customer will not be paying for the bike until January 7th of the next year.

Dr. Account Receivable, Cr. Sales Revenue (to record a December sale made on account)

accounts on the balance sheet are __________ accounts

permanent

the balances in a temporary account are transferred to ______________

retained earnings (a permanent account)

to directly close to retained earnings…

dr revenue and cr retained earnings, dr retained earnings and cr expenses

to close using the income summary…

debit income summary, credit retained earnings