Faiq Assign 3 Part 2

8/3/2019 Faiq Assign 3 Part 2

http://slidepdf.com/reader/full/faiq-assign-3-part-2 1/10

B-03.10

Revenues Revenue (cash-basis) = 100,000, Change in receivables =

10,000, Accrual Basis = 110,000

Supplies $5000 will be recorded as Supplies Expense (COGS) on theIncome Statement, as it reflects the amount of supplies used

during the period. Purchased = 25000, Accrual basis = 20,000

Rent Cash basis = 13,000, Prepaid = 1000, Accrual basis = 12,000

Equipment Depreciation expense per year = 5000, Net book value = 20000

- 5000 = 15,000

Wages Wages paid = 145,000, Wages payable = 12,000, Accrual basis= 157,000



I-03.01

Accounting Income vs. Economic Income

Accounting Income arises from any transaction which results in the inflow of money.Be it inflow from revenues or inflow from gains.

Economic Income means overall increase in the control over goods and services. Itmeans increase in purchasing power either by increase in income or gain in assetsheld.

Revenues vs. Gains

Revenues are inflows from the firm’s basic operating activities.

Gains are inflows resulted from activities, events, or transactions other than firm’s

operations. For example gain on the sale of investment securities

Expenses vs. Losses

Expenses are outflows made to add value in the goods or services to make them getrevenues. Basically outflows for the firm’s basic operating activities

Losses are again all those outflows resulted from activities, events, or transactionsother than firm’s operations. For example, loss in the disposal of securities

Fiscal Year vs. Calendar Year

Fiscal year can start from any point and it will cover a period of exact one year.Different sectors may have different fiscal years like banking sector fiscal year startsfrom July 01 and ends on June 30 next year.

Calendar year starts from Jan 1 – Dec 31

Revenue Recognition vs. Expense Recognition

Revenue recognition normally occurs at the time services are rendered or when goodsare sold and delivered. The conditions for revenue recognition are

(a) an exchange transaction(b) the earnings process being complete

Expense recognition will typically follow one of three approaches, depending on thenature of the cost:a) Associating cause and effectb) Systematic and rational allocationc) Immediate recognition



Accruals vs. Prepaids

Accruals are the revenues or expenses that are accumulated throughout a certainperiod.

Prepaids are the revenues or expenses received or paid in advance.

Balance Sheet Approach vs. Income Statement Approach

The expenditure was initially recorded into a prepaid account on the balance sheetapproach.

Whereas in Income statement approach, the Expense account is debited at the time ofpurchase.

Cash Basis vs. Accrual Basis

Cash basis approach, revenue is recorded when cash is received (no matter when it isearned), and expenses are recognized when paid (no matter when incurred).

Accrual basis, the revenue and expense are recognized when incurred



I-03.04

GENERAL JOURNAL

Date Accounts Debit Credit

Mar. 31 Accrued Interest Expense 21,678

Interest Liability 21,678

To adjust accrued interest

Mar. 31 A/R 54,800

Revenue 54,800

To adjust earned revenues

Mar. 31 Insurance Expense 4,000Prepaid Insurance 4,000

To adjust for the portion used

Mar. 31 COGS 149,304

Supplies 149,304

To adjust supplies expense

Mar. 31 Unearned Revenue 24,966Revenue 24,966

To adjust revenue earned

Mar. 31 Advertising Expense 20,000

Prepaid Advertising 20,000

To adjust the expense accrued



I-03.06

Scenario 1: Balance Sheet Approach

06/01/X1 Prepaid Insurance 1,500

Cash 1,500

To record payment for 1-year policy

12/31/X1 Insurance Expense 875

Prepaid Insurance 875

To record insurance "used" ($1,500 X 7/12)

Prepaid Insurance Insurance Expense

06/01/X1 1,500 875 12/31/X112/31/X

1875

625

Scenario 1: Income Statement Approach

06/01/X1 Insurance Expense 1,500

Cash 1,500

To record payment for 1-year policy

12/31/X1 Prepaid Insurance 625

Insurance Expense 625

To record insurance "unused" ($1,500 X 5/12)

Prepaid Insurance Insurance Expense

12/31/X1 625 06/01/X1 1,500 625 12/31/X1

875




08/01/X1 Cash 20,000

Unearned Revenue 20,000

To record unearned revenue

12/31/X1 Unearned Revenue 8,000

Revenue 8,000

To adjust for the revenue earned

Unearned Revenue Revenue

12/31/x1 8,000 20,000 08/01/x1 8,000 12/31/x1

12,000


08/01/X1 Cash 20,000

Revenue 20,000

To record revenue

12/31/X1 Revenue 12,000


To adjust portion of unearned revenue 'earned'


12,000 12/31/x1 12/31/x1 12,000 20,000 08/01/x1

8,000




12/01/X1 Prepaid Rent 3,000Cash 3,000

To record rent paid for Trade show

12/31/X1 Rent Expense 1,000

Prepaid Rent 1,000

To adjust for the portion used

Prepaid Rent Rent Expense12/01/x1 3,000 1,000 12/31/x1 12/31/x1 1,000

2,000


12/01/X1 Rent Expense 3,000

Cash 3,000

Paid for trade show

12/31/X1 Prepaid Rent 2,000

Rent Expense 2,000

To adjust for the unexpired portion

Prepaid Rent Rent Expense

12/01/x1 2,000 12/01/x1 3,000 2,000 12/31/x1

1,000




04/01/X1 Cash 1,000


To record revenue not earned

06/20/X1 Unearned Revenue 1,000Cash 1,000

To adjust for agreement cancellation


06/20/x1 1,000 1,000 04/01/x1


04/01/X1 Cash 1,000

Revenue 1,000

To record revenue

06/20/X1 Revenue 1,000

Cash 1,000

Agreement cancelled


06/20/x1 1,000 1,000 04/01/x1



I-03.07

WWPS

Cash Basis Income Statement

For the Month Ending June 30, 20XX

Revenues

Services to customers $ 217,250

Expenses

Wages $ 70,000

Equipment 13,000

Supplies 76,000 159,000

Cash basis income $ 58,250

Cash basis revenues:

Down Payment $ 92,000

Final Payment 35,250

Payment on wedding 90,000

$ 217,250

WWPS

Income Statement

For the Month Ending June 30, 20XX

Revenues

Services to customers $ 271,400

Expenses

Wages $ 81,000

Depreciation 14,000

Supplies 118,300 213,300

Net income $ 58,100

Accrual basis revenues:

Revenue (92 x 2950) $ 271,400

Expenses:

Wages (12000-70000-23000) $ 81,000

Supplies (123500+76000-81200) 118,300

Depreciation (700000 / 50) 14,000

$ 213,300



Documents

Faiq Assign 3 Part 2