Chapter MEASUREMENT OF

5 BUSINESS INCOME
 Learning Objectives
 Explain expenses and revenue concept
 Describe permanent and temporary
accounts
 Explain the accounting cycle
 REVENUE
 Are the gross increase in owner’s equity
resulting from business activities entered into
for the purpose of earning income
 Revenues usually result in an increase in an
asset.
 Revenue result from the sales of goods and
services, fees, interest, dividends, royalties,
grants and rent.
 EXPENSES
 Expenses are decreases in owner’s equity that result from
operating the business.
 They are the costs of assets consumed or services used in
the process of earning revenue
 Decrease in assets or an increase in liabilities
 E.g: rent expense, delivery expense, supplies expense,
interest expense, salary expense, utility expense
Recognizing Revenues and
Expenses
Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when cash
earned and expenses is received and
are recognized when expenses recorded
incurred. when cash is paid.

Accounting
Recognizing Revenues and
Expenses
Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when cash
earned and expenses is received and
are recognized when expenses recorded
incurred. when cash is paid.

Not GAAP
Accounting
Recognizing Revenues and
Expenses (Accrual Basis)
1. Revenue Recognition
- Revenue be recorded when earned, either
 Ownership has been transferred
 Services has been completely provided
 Percentage of completion method
 Installment method

We have delivered the

product to our customer,
so I think we should record
the revenue earned.
Recognizing Revenues and
Expenses (Accrual Basis)
2. Matching Principle
 Expenses are matched against revenues, and recorded in the
same period in which the related revenues are earned

Now that we have

Summary recognized the revenue,
of Expenses let’s see what expenses
Rent $1,000 we incurred to
Gasoline 500 generate that revenue.
Advertising 2,000
Salaries 3,000
Utilities 450
and . . . . ....
Example
Example – Cash Basis
Insurance Expense 2006
Jan Feb Mar Apr

$ - $ - $ - $ -
May Jun Jul Aug

$ - $ - $ - $ -
Sep Oct Nov Dec

$ - $ - $ - $ 2.400
On the cash basis the entire $2,400 would be
recognized as insurance expense in 2006. No insurance
expense from this policy would be recognized in 2007 or
2008, periods covered by the policy.
Example - Accrual Basis
Insurance Expense 2006
Jan Feb Mar Apr

$ - $ - $ - $ -
May Jun Jul Aug On the accrual basis
$ - $ - $ - $ - $100 of insurance
Sep Oct Nov Dec
expense is recognized in
$ - $ - $ - $ 100
Insurance Expense 2007
2006, $1,200 in 2007,
Jan Feb Mar Apr and $1,100 in 2008. The
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug expense is matched with
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
the periods benefited by
$ 100 $ 100 $ 100 $ 100 the insurance coverage.
Insurance Expense 2008
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
Examples: Revenue Recognition

20 Dec 2007 : Completed work for a

client and sent a bill for RM5,000 to be
paid within 30 days. The accounting
period for year 2007 is 1 January 2007 -
31 December 2007.
 Cash basis?
 Accrual basis?
Temporary and Permanent
Accounts
Revenues Assets

Withdrawals
Expenses

Liabilities

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
Theclosing
closing process
process
applies
appliesonly
onlyto
to
temporary
temporaryaccounts.
accounts.
 The Accounting Cycle
Closing
Entries Source
Financial Documents
Statements

Adjusted Journal
Trial Balance

Adjustments Trial Balance Ledger