...300 April 06, 2015 Working With Financial Statements Introduction – Revenue Recognition Principle - Explain revenue recognition principle Expense Recognition Principle - It is to be expected that in accounting there are principles to follow, just as they are in other various fields regarding finances. An example of this is banking where allocations and limitations are set. According to the principle of expense recognition revenue reflects in earning periods. Our expression as consumers is to enter into an agreement that has something to offer both parties. As the seller I am choosing the price, and the buyer agrees to listed price. The transaction has informed an agreement that is recognized through assurance. (Boundless Accounting) To recognize expenses, revenue is regarded and allies to the balance sheet. For example as the owner of a good I have fixed costs, and production cost that are in place whether I sell the goods or not. In lieu of the expenses recognition, we must meet the matching principle to move up own our balance sheet. An income statement shows these transactions due to the fact we are forced to record revenue and expenses, specifically those relating in cash. Costs are to broad to list all of them in an essay forum. However the two main categories are product costs and period costs. What are these? Period costs are things such as payroll, admin related expenses, and benefits solutions. In most cases these are documented when they take place...
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...drug and alcohol related matters are limited under the memberships. 2. Legal Plan Services is mandated to follow statement No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles concepts. The statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The objective is to prepare all of their products following the same revenue and expense recognition rules (deferral of revenue and accrual recognition of expenses). An explanation of specific recognition rules follows. * ASC 605-10-05-1 “The Revenue Recognition Topic provides guidance for transaction-specific revenue recognition and certain matters related to revenue-generating activities that are not addressed specifically in other topics.” * ASC 605-28-25 “The Recognition Section provides guidance on the required criteria, timing, and location (within the financial statements) for recording a particular item in the financial statements. Disclosure is not recognition” 3. Legal Plan Services recognize various types of...
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...for businesses to continue thriving and maintain sustainability, without these tools a business will fail and people will out put out of work. Proper accounting record keeping is obtained so management can review data and information regarding business expenses and daily revenue so proper insight can be given on how the direction of the company should move forward. This data is needed to not only inform the employees of the business, but also the investing parties of that business as well. Success in business is equated to being accountable of all aspects of revenue and expenses. To help aid in the understanding of the practice of accounting, Team C will discuss the subjects of revenue and expense recognition principles. We will also discuss the importance of journal adjustments that are prepaid, unearned, and accrued for both revenues and expenses over time. Each section this team will discuss aids in providing and maintaining the integrity for financial statements to become properly completed. Providing information is correctly entered permits businesses to see a clear and precise accounting picture of the efforts to maintain a company. The revenue recognition principle requires the company to only recognize earned revenue in the accounting period. This principle falls under generally accepted accounting principles or GAAP. The principle applies to companies depending on the type of accounting base they use. Under accrual-basis accounting, for example a delivery service company...
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...stockholders, and the Internal Revenue Service requires all businesses to file annual tax returns. Many business transactions affect more than one of these arbitrary time periods. For example, a new building purchased by Bank of America or a new airplane purchased by Southwest Airlines will be used for many years. It does not make sense to expense the full cost of the building or the airplane at the time of purchase because each will be used for many subsequent periods. Instead, we determine the impact of each transaction on specific accounting periods. When determining the amount of revenues and expenses to report in a given accounting period can be challenging. Proper reporting requires an understanding of the nature of the company’s business. Two principles are used as guidelines; they are the revenue recognition principle and the matching principle. The revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned. For example, in a service company, revenue is considered to be earned at the time the service is performed. When recognizing expenses, a simple rule is followed; “Let the expenses follow the revenues.” Which means expense recognition is tied to revenue recognition. The practice of expense recognition is referred to as the matching principle because it dictates that efforts (expenses) be matched with accomplishments (revenues). Recognizing expenses too early overstates current period expense; recognizing them too...
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...June 1, 2014. The trial balance at June 30 is as follows. LUMAS CONSULTING Trial Balance June 30, 2014 | | | Debit | | Credit | Cash | | $ 6,850 | | | Accounts Receivable | | 7,000 | | | Supplies | | 2,044 | | | Prepaid Insurance | | 3,480 | | | Equipment | | 15,000 | | | Accounts Payable | | | | $ 4,280 | Unearned Service Revenue | | | | 5,200 | Common Stock | | | | 22,134 | Service Revenue | | | | 8,000 | Salaries and Wages Expense | | 4,000 | | | Rent Expense | | 1,240 | | | | | $39,614 | | $39,614 | In addition to those accounts listed on the trial balance, the chart of accounts for Lumas also contains the following accounts: Accumulated Depreciation—Equipment, Salaries and Wages Payable, Depreciation Expense, Insurance Expense, Utilities Expense, and Supplies Expense. Other data: 1. | | Supplies on hand at June 30 total $850. | 2. | | A utility bill for $181 has not been recorded and will not be paid until next month. | 3. | | The insurance policy is for a year. | 4. | | Services were performed for $4,370 of unearned service revenue by the end of the month. | 5. | | Salaries of $1,338 are accrued at June 30. | 6. | | The equipment has a 5-year life with no salvage value and is being depreciated at $250 per month for 60 months. | 7. | | Invoices representing $4,206 of services performed during the month have not been recorded as of June 30. | Prepare the adjusting entries for the month...
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...regarding accounting. Some of these key concepts included; the differences between accrual basis and cash basis accounting, adjusting entries, and the adjusted trial balance. Accrual Accounting In accrual accounting, companies post income when it is earned and expenses are posted when they occur. Accrual accounting is based on the revenue recognition principle and the expense recognition principle. The revenue recognition principle means that revenue is claimed when the service is completed, even if the customer has not paid yet. "Let the expenses follow the revenue" (Kimmel, Weygandt, & Kieso, 2010, p. 163). Expenses necessary to earn revenue must be posted in the same accounting period when the revenue is posted; this is expense recognition. Cash Basis Accounting In cash basis accounting, revenue and expenses are claimed when the company receives cash. This particular basis of accounting can be inconsistent and when it comes to formal entity financial reporting. Cash basis accounting violates the generally accepted accounting principles (GAAP) because it does not meet the revenue recognition and expense recognition principles. Adjusting Entries Adjusting entries are important because they follow the revenue recognition principle as well as the matching principle required by GAAP. Adjusting entries are created and entered into a company’s journal and the general ledger. Inputting these entries increases the accuracy of a company’s true financial standing at the end of a...
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...paragraph 35 and 36. However, some requirements are ambiguous and further clarifications are required. When reviewing the exposure draft, we have several major concerns with satisfaction of performance obligations. There should be persuasive evidence to show the existence of an agreement. Delivery of goods should have been occurred and services should have been rendered for revenue recognition. Sufficient evidence should support for the proposal to result in revenue being recognized over time. Also, there is chance that revenue could be recognized without the entity being reasonably assured to have a right to consideration. As is explained below, we have some disagreements. For 35(a), customer controls asset as it is created or enhanced. We partially agree with the concept of recognizing revenue over time when the entity creates or enhances an assets that the customer controls is consistent with the principle of recognizing revenue with transfer of goods and services. It follows the core principle in paragraph 31. However, this assumption may be problematic, controls may not be transferred over time but at a point in time. Hence, the proposal could hardly be applied to the situation where a customer has obtained control of goods in advance of the entity satisfying the performance obligation...
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... CHAPTER 17 Advanced Issues in Revenue Recognition CONTENT ANALYSIS OF END-OF-CHAPTER ASSIGNMENTS NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY TIME EST. AACSB AICPA BLOOM’S Q17-1 Revenue Recognition Recognition of revenue when the earnings process is not complete 1 ! Easy 5 Analytic Measurement Comprehension Q17-2 Revenue Recognition Distinguish between the accounting terms recognition and realization 1 ! Easy 5 Analytic Measurement Comprehension Q17-3 Revenue Recognition Revenue recognition for a motion picture company; licensing rights; differences between GAAP and IFRS 1 ! Easy 5 Analytic Measurement Comprehension Q17-4 Revenue Recognition Differing timing on when to recognize revenue 2 ! Easy 5 Analytic Measurement Comprehension Q17-5 Revenue Recognition Conceptual factors associated with revenue recognition 2 ! Easy 5 Analytic Measurement Comprehension Q17-6 Revenue Recognition Alternatives Recognizing revenue for various recognition alternatives 2 ! Easy 5 Analytic Measurement Comprehension Q17-7 Revenue Recognition Recognition of revenue when the earnings process is not complete; discussion of revenue recognition method alternatives 3 ! Easy...
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... Brandywine 1 1. Construct Brandywine’s 2007 income statement The income statement summarizes the operations (i.e.the activities) of an organization with a focus on its revenues, expenses, and profitability (Gapenski, pg. 74,2008). The income statement of Brandywine Homecare is presented in Table1: Brandywine Homecare Income Statement 2 Revenues: $12million Expenses: $ 9 million Depreciation $1.5million Total Expenses $ 900,001.5 million Net Income $3.5 million Brandywine 2 2. What were Brandywine’s 2007 net income,...
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...Topics: Income from continuing operations * Income from continuing operations includes the revenues, expenses, gains and losses that will probably continue in future periods. * In general, gains and losses result from changes in equity that do not result directly from operations but nonetheless are related to those activities. * INCOME TAX EXPENSE is shows as a separate expense in the income statement. * TAXABLE INCOME comprises revenues, expenses, gains, and losses as measured according to the regulations of the appropriate taxing authority. * While the actual measurement of income tax expense can be complex, at this point we can consider income tax expense to be a simple percentage of income before taxes. * A distinction often is made between operating and nonoperating income. * OPERATING INCOME includes revenues and expenses directly related to the primary revenue-generating activities of the company. * NOPERATING INCOME relates to peripheral or incidental activities of the company. (like selling investments and interest expense in nonoperating income) Earnings quality * The presentation of the components of net income and the related supplemental disclosures provide clues to the user of the statement in an assessment of earnings quality. * Earnings quality is used as a framework for more in-depth discussions of operating and nonoperating income. * The term EARNINGS QUALITY refers to the ability...
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...bad debts to expense in the period when individual invoices have been clearly identified as bad debts. The specific activity needed to write off an account receivable under the direct write off method with accounting software is to create a credit memo for the customer in question, which exactly offsets the amount of the bad debt. Creating the credit memo will involve a debit to a bad debt expense account and a credit to the accounts receivable account. The method does not involve a reduction in the amount of recorded sales, only the increase of the bad debt expense of the bad debt. This approach violates the matching principle under which all costs related to revenue are charged to expense in the same period in which you recognize the revenue, so that the financial results reveal the entire extent of a revenue-generating transaction in a single accounting period. The direct write off method delays the recognition of expenses related to a revenue-generating transaction, and so is considered an excessively aggressive accounting method, since it delays some expense recognition, making a reporting entity appear more profitable in the short term than it really is. For example, a company may recognize $1 million in sales in one period, and then wait three or four months to collect all of the related accounts receivable, before finally charging some items off to expense. This creates a lengthy delay between revenue recognition and the recognition of expenses that are directly...
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...purchase of an undivided one-eighth interest in the aircraft is basically the same as leasing the plane. In the Trans-Share case, customers enter into purchase agreements with the company to lease aircraft for a five year period. Characteristics of a lease can be found in code ASC 840-20-25-1, which indicates that rent shall be charged to expense by the lessee and reported as income by the lessor over the lease term as it becomes receivable. However if collectability of assets received is doubtful, revenue may be recognized as cash is received instead of accruing revenues. As a lease, the purchase of the fractional interest in the airplane would not imply ownership. It would simply be considered prepaid rent or an advance lease payment. It should therefore be recognized in periodic installments over the period of the lease. This way, if the lessee decides to terminate the contract, it will be easier to calculate how much he is due back and how much of the revenue should be allocated and recognized. Disclosure is not recognition. Although the sales price of the fractional ownership is disclosed and collected by Trans-Share, operating lease revenue should not be recognized until each rental amount has been accrued. On the other hand, costs related to the leased asset, such as depreciation and executory costs like maintenance, may be expensed as incurred. Accordingly, the lease profits for Trans-Share will equal the difference between the airplane use payments received from the...
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...flow through time 2.) in terms of the its status or state as of one moment of time Flows in a business are continuous (see diagram below) Selling Activities Collection Activities Purchasing or Production Activities Financial Accounting: Basic Accounting Concepts: (The Income Statement) There are three commonly types of businesses, namely merchandising, service oriented, and manufacturing. In all of these three types of businesses the income statement focuses on the section the flow diagram is labelled selling activities. In selling activities reporting consist of two elements, inflows and outflows. For the inflow: Revenue-the result from sale of goods and services to customers For the outflow: Expenses- the outflows that were made in order to generate these revenues Income is the amount by which revenues exceed expenses. Since the word income is often used with various qualifying adjectives, the term net income is used to refer...
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...remember that the accrual basis of accounting agrees with both the matching principle and the revenue recognition principle, and that the cash basis of accounting violates both of these principles. Thus, of the two bases, only the accrual basis of accounting complies with generally accepted accounting principles. The basis of accounting utilized by a company depends on the nature of the company. Both of these bases of accounting serve distinct purposes for different reasons, depending on the accounting needs of a given company. Accrual basis accounting Accrual basis accounting requires that you record events in the time period in which they occur, regardless if there is money exchanged or not. Accrual basis accounting makes you follow the revenue recognition principle and the matching principle. Revenue recognition principle states that revenue is recorded in the time period which it occurred, not when money is received. Matching principle, also known as the expense recognition principle, states that expenses are recorded when they are accrued not when you pay for them. Accrual accounting takes in to account deferrals and accruals. Examples of deferrals are prepaid expenses such as prepaid insurance premiums and unearned revenues such as prepaid deposits for work to be complete at a later date. Examples of accruals are accrued revenues such as accounts receivable and accrued expenses such as account payable. Accrual basis accounting also allows for depreciation of assets...
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...Income statement. 4. President's letter to shareholders. When should an expenditure be recorded as an asset rather than an expense? 1. Always 2. If the amount is material. 3. When future benefit exists. 4. President's letter to shareholders Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting? 1. Historical cost. 2. Expense recognition. 3. Full disclosure. 4. Revenue recognition. Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a 1. Trade-off between timeliness and verifiability. 2. Neutrality and consistency. 3. Verifiability and faithful representation. 4. Faithful representation and comparability. Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock price? 1. Going concern. 2. Historical cost. 3. Expense recognition. 4. Full disclosure. What is the general approach as to when product costs are recognized as expenses? 1. In the period when the vendor invoice is received. 2. In the period when the expenses are incurred. 3. In the period when the related revenue is recognized. 4. In the period when the expenses are paid. Not adjusting the amounts reported in the...
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