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Reports increase in shareholders equity due to operations over a period of time Income statement equation:
Net Income = Revenue Expenses Net income is also called earnings or net profit
Accrual Accounting
Accounting recognition of revenues and expenses are tied to business activities, not to cash flows Revenues are recognized when goods or services are provided (revenue recognition criteria) => Revenues Cash inflows Expenses are recognized in the same period as the revenues they helped to generate (matching principle) => Expenses Cash outflows => Net income Net cash flow
Revenue
Revenue is an increase in shareholders equity (not necessarily cash) from providing goods or services. Revenue is recognized when both:
It is earned (i.e. goods or services are provided) and It is realized (i.e. payment for goods or services received in cash or something that can be converted to a known amount of cash)
Expenses
Expenses are decreases in shareholders equity (not necessarily cash) that arise in the process of generating revenues Expenses are recognized when either:
Related revenues are recognized (product costs) or Incurred, if difficult to match with revenues (period costs and unusual events)
2. BOC collects $300,000 cash in December for washing machines delivered in October.
3. BOC Realty leases space to a tenant for the months of December and January for $20,000, all of which is paid for in cash in December.
5. BOC Bank is owed $100,000 of interest on a loan for December and receives the payment in January.
6. BOC issues 20,000 shares of stock in December and receives $10/share, which is $2/share more than they expected.
2. BOC Automotive uses the engines to make cars at a total cost of $10,000,000 in December.
5. BOC Automotive pays its auditor $50,000 in December for services to be rendered in December and January.
Journal Entry
Journal Entry
4. Unadjusted trial balance: Account balances are summed on a worksheet to verify that debits equal credits.
Adjusting Entries
Adjusting entries
Internal transactions that update account balances in accordance with accrual accounting prior to the preparation of financial statements
Deferred Expenses
Question: Are there any assets that have been used up this period and should be expensed? Examples:
Prepaid Rent Prepaid Insurance Depreciation or amortization
Property, plant, and equipment Intangible assets (e.g., Patents)
Journal Entry:
Dr. Expense Cr. Prepaid Asset
Deferred Revenues
Question: Are there any liabilities that have been fulfilled by delivery of goods or services that should be recognized as revenue? Examples:
Unearned rental revenue Deferred subscription revenue
Journal Entry:
Dr. Unearned Revenue Liability Cr. Revenue
Accrued Expenses
Question: Have any expenses accumulated during the period that have not yet been recorded? Examples:
Income Taxes Payable Interest Payable Salaries and Wages Payable
Journal Entry:
Dr. Expense Cr. Payable Liability
Accrued Revenue
Question: Have any revenues accumulated during the period that have not yet been recorded? Examples:
Interest Receivable Rent Receivable
Journal Entry:
Dr. Receivable Asset Cr. Revenue
Terminology
Tangible assets (physical assets) require depreciation Intangible assets (abstract assets) require amortization
Straight-line Depreciation:
Depreciation expense = (Original Cost Salvage Value) / Useful Life
Super T-account
Assets
Assets Dr. Cr. + -
Cr. +
Revenues
Dr. +
Cr. -
Dr. -
Cr. +
2. December 31: End of the fiscal year, and no principal or interest payments have been made yet.
3. January 6: The employee sends a check for three months of interest on the loan.
7. December 31: End of the fiscal year. Is an adjusting entry needed? If so, what is it?
9. December 31: End of the fiscal year. Is an adjusting entry needed? If so, what is it?
11. December 31: End of the fiscal year: Is an adjusting entry needed? If so, what is it?
Deferred Expense
Accounting Recognition Dr. Expense Cr. Liability Dr. Asset Cr. Revenue
Cash Transaction Dr. Liability Cr. Cash Dr. Cash Cr. Asset
Accrued Revenue
Noncurrent assets
Tangible assets Intangible assets
Noncurrent liabilities
Bank borrowings and bonds Other types of liabilities (deferred taxes, pensions)
Stockholders equity
Contributed capital Retained earnings
Permanent Accounts
Accumulate the effects of transactions over the entire life of business Balance sheet accounts (Assets, Liabilities, Contributed Capital, Retained Earnings)