Chapter 4

Revenue Recognition Principle Process

1. identify the contract with customers 2. identify the separate performance obligations in the contract. 3. determine the transaction price 4. allocate the transaction price to the separate performance obligations 5. recognize revenue when each performance obligation is satisfied

"Depreciation on equipment of $150 was omitted."

150

"Accrued but unpaid wages at July 31 of $360 were not included."

2100(given) + 360

"The December utility bill for $425 was unrecorded on December 31. Greenock paid the bill on January 11."

31 - debit utilities expense credit ac pay 11- debit acc pay credit cash

"Greenock is open 7 days a week and employees are paid a total of $3,500 every Monday for a 7-day (Monday-Sunday) workweek. December 31 is a Thursday, so employees will have worked 4 days (Monday, December 28-Thursday, December 31) that they have not been paid for by year-end. Employees will be paid next on January 4."

3500 / 7= 500 500 x 4 = 2000 31st- debit salary and wages expense credit salary and wages pay 4th- debit sal and wages pay and expense credit cash

"Greenock signed a $45,000, 5% bank loan on November 1, 2021, due in 2 years. Interest is payable on the first day of each following month."

45000 x .05 / 12 31- debit interest ex credit interest pay 1st- debit interest pay credit cash

"Service performed but unrecorded totaled $700."

5500(given) -700

"Depreciation on buildings is $6,000 per year."

6000/12 = 500. bc annual !!

"Supplies expense includes $200 of supplies that are still on hand at July 31."

900 (given) - 200

income statement given table - depreciation expense

9200/ 4 x 6/12 opened on Nov. and closed Apr 30.... 6 month period

adjusted trial balance

After a company has journalized and posted all adjusting entries, it prepares another trial balance from the ledger accounts. This trial balance is called an adjusted trial balance. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments. Because the accounts contain all data needed for financial statements, the adjusted trial balance is the primary basis for the preparation of financial statements.

balance sheet given table - acc receivable

At April 30, 2022, customers owe Franken Company $540 for services they have received but have not yet paid for. 540 !!!

income statement given table - service revenue

Cash receipts from ski and snowboard repair services 32,150 (given) + customers owe Franken Company $540 for services they have received but have not yet paid for (given)

unearned revenues

Companies record cash received before services are performed by increasing (crediting) a liability account called unearned revenues the company has a performance obligation to transfer a service to one of its customers the adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

income statement given table - salary and wages expense

Part-time helper's wage payments 2,600 (given) + The part-time helper is owed $420 at April 30, 2022, for unpaid wages (Given)

accrued revenues

Revenues for services performed but not yet recorded at the statement date an adjusting entry for accrued revenues results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account

Income Summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).

balance sheet given table - salary and wages payable

The part-time helper is owed $420 at April 30, 2022, for unpaid wages. 420!!!!!!

Revenue Recognition Principle

The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

worksheet

a multiple-column form that may be used in the adjustment process and in preparing financial statements. A worksheet is not a permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is merely a supplemental device used to make it easier to prepare adjusting entries and the financial statements

Periodicity Assumption

accounting divides the economic life of a business into artificial time periods Accounting time periods are generally a month, a quarter, or a year

Which basis of accounting (cash or accrual) provides more useful information for decision-makers?

accrual

contra asset account

an account offset against an asset account on the balance sheet (accumulated depreciation

permanent accounts

balance sheet accounts whose balances are carried forward to the next accounting period

Cash Basis Accounting

companies record revenue at the time they receive cash. They record an expense at the time they pay out cash. The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).

notes on question 11 !!!

dddd

"Greenock rented some of its unused warehouse space to a client for $6,000 a month, payable the first day of the following month. It received the rent for the month of December on January 2."

debit acc rec credit rent revenue 2nd- debit cash credit acc rec

"Greenock receives a fee from Pizza Shop next door for all pizzas sold to customers using Greenock's facility. The amount owed for December is $300, which Pizza Shop will pay on January 4. (Hint: Use the Service Revenue account.)"

debit acc rec credit service revenue 4th- debit cash credit acc rec

"Services performed but unbilled (and no receivable has been recorded) at October 31 are $280."

debit acc receivable credit service revenue

"Unpaid maintenance and repairs costs were $2,300."

debit maintenance and repairs expense credit acc pay

"Accrued salaries at October 31 are $1,400."

debit salary and wages expense credit salary and wages payable

"As of October 31, services worth $800 related to the previously recorded unearned revenue had been performed"

debit unearned service revenue credit service revenue

adjusting entries

ensure that the revenue recognition and expense recognition principles are followed. Adjusting entries are required every time a company prepares financial statements. The company analyzes each account in the trial balance to determine whether it is complete and up-to-date for financial statement purposes. Every adjusting entry will include one income statement account and one balance sheet account.

accrued expenses

expenses incurred but not yet paid or recorded at the statement date an adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.

Prepaid expenses (prepayments)

expenses paid in cash before they are used or consumed prepaid expenses are costs that expire either with the passage of time (e.g., rent and insurance) or through use (e.g., supplies). an adjusting entry for prepaid expenses results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account

when journalizing transactions when given table

first journalizing has cash in each transaction second journalizing is all the "31st" adjusting entry transactions no cash expenses, accounts receivable, unearned service revenue FIRST

the adjusting entry for accruals will

increase both a balance sheet and an income statement account

earnings management

is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income

Expense Recognition Principle

it dictates that efforts (expenses) be recognized with results (revenues) in the period when the company makes efforts to generate those revenues.

Accural Basis Accounting

means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged

companies manage earnings in a few ways:

one time items inflate revenue improper adjusting entires

to get salary and wages

part time helpers wage + salary and wages expense (420)

"The balance in Prepaid Rent represents 4 months of rent costs." debit rent expense credit prepaid rent

prepaid rent given / 4

interest rate-"The investment in the notes receivable earns interest at a rate of 6% per year." debit interest receivable credit interest revenue

principle/investment in notes recievable (20,000) x rate/given in question(.06) x number of months (1/12) = 100

quality of earnings

provides full and transparent information that will not confuse or mislead financial statement users

temporary accounts

revenues, expenses, dividends

to get revenue

services: 540 payment to purchase repair shop equipment: 9200 (4 years: 6/12) depreciation: 1150 salary and wages expense: 420 cash receipts from ski and snowboard repair services: 32150 32150 + 540 = 32690

"Supplies on hand at the end of the month totaled $18,600." debit supplies expense credit supplies

subtract 18,600 from supplies given in table

Book Value

the difference between the cost of a depreciable asset and its related accumulated depreciation

useful life

the estimated determinable life of a fixed asset

Depreciation

the process of allocating the cost of an asset to expense over its useful life. Depreciation is an allocation concept, not a valuation concept. That is, depreciation allocates an asset's cost to the periods in which it is used. Depreciation does not attempt to report the actual change in the value of the asset.

closing entries

transfer net income (or net loss) and dividends to Retained Earnings, so the balance in Retained Earnings agrees with the retained earnings statement. closing entries produce a zero balance in each temporary account. As a result, these accounts are ready to accumulate data about revenues, expenses, and dividends that occur in the next accounting period. Permanent accounts are not closed.