B-03.

10 Revenues Revenue (cash-basis) = 100,000, Change in receivables = 10,000, Accrual Basis = 110,000 $5000 will be recorded as Supplies Expense (COGS) on the Income Statement, as it reflects the amount of supplies used during the period. Purchased = 25000, Accrual basis = 20,000 Cash basis = 13,000, Prepaid = 1000, Accrual basis = 12,000 Depreciation expense per year = 5000, Net book value = 20000 - 5000 = 15,000 Wages paid = 145,000, Wages payable = 12,000, Accrual basis = 157,000

Supplies

Rent Equipment

Wages

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. It means increase in purchasing power either by increase in income or gain in assets held. Revenues vs. Gains Revenues are inflows from the firms basic operating activities. Gains are inflows resulted from activities, events, or transactions other than firms 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 get revenues. Basically outflows for the firms basic operating activities Losses are again all those outflows resulted from activities, events, or transactions other than firms 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 starts from 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 goods are 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 the nature of the cost: a) Associating cause and effect b) Systematic and rational allocation c) Immediate recognition

Accruals vs. Prepaids Accruals are the revenues or expenses that are accumulated throughout a certain period. 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 sheet approach. Whereas in Income statement approach, the Expense account is debited at the time of purchase. Cash Basis vs. Accrual Basis Cash basis approach, revenue is recorded when cash is received (no matter when it is earned), 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 Interest Liability To adjust accrued interest

21,678 21,678

Mar. 31

A/R Revenue To adjust earned revenues

54,800 54,800

Mar. 31

Insurance Expense Prepaid Insurance To adjust for the portion used

4,000 4,000

Mar. 31

COGS Supplies To adjust supplies expense

149,304 149,304

Mar. 31

Unearned Revenue Revenue To adjust revenue earned

24,966 24,966

Mar. 31

Advertising Expense Prepaid Advertising To adjust the expense accrued

20,000 20,000

I-03.06

Scenario 1: Balance Sheet Approach 06/01/X1 Prepaid Insurance Cash To record payment for 1-year policy Insurance Expense Prepaid Insurance To record insurance "used" ($1,500 X 7/12) Prepaid Insurance
06/01/X1

1,500 1,500

12/31/X1

875 875

Insurance Expense
12/31/X 1

1,500

875 12/31/X1

875

625

Scenario 1: Income Statement Approach 06/01/X1 Insurance Expense Cash To record payment for 1-year policy Prepaid Insurance Insurance Expense To record insurance "unused" ($1,500 X 5/12) Prepaid Insurance
12/31/X1

1,500 1,500

12/31/X1

625 625

Insurance Expense
06/01/X1

625

1,500 875

625

12/31/X1

Scenario 2: Balance Sheet Approach 08/01/X1 Cash Unearned Revenue To record unearned revenue Unearned Revenue Revenue To adjust for the revenue earned Unearned Revenue
12/31/x1

20,000 20,000

12/31/X1

8,000 8,000

Revenue
08/01/x1

8,000

20,000 12,000

8,000

12/31/x1

Scenario 2: Income Statement Approach 08/01/X1 Cash Revenue To record revenue Revenue Unearned Revenue To adjust portion of unearned revenue 'earned' Unearned Revenue 12,000
12/31/x1 12/31/x1

20,000 20,000

12/31/X1

12,000 12,000

Revenue 12,000 20,000 8,000

08/01/x1

Scenario 3: Balance Sheet Approach 12/01/X1 Prepaid Rent Cash To record rent paid for Trade show Rent Expense Prepaid Rent To adjust for the portion used Prepaid Rent
12/01/x1

3,000 3,000

12/31/X1

1,000 1,000

Rent Expense
12/31/x1

3,000 2,000

1,000 12/31/x1

1,000

Scenario 3: Income Statement Approach 12/01/X1 Rent Expense Cash Paid for trade show Prepaid Rent Rent Expense To adjust for the unexpired portion Prepaid Rent
12/01/x1

3,000 3,000

12/31/X1

2,000 2,000

Rent Expense
12/01/x1

2,000

3,000 1,000

2,000

12/31/x1

Scenario 4: Balance Sheet Approach

04/01/X1

Cash Unearned Revenue To record revenue not earned Unearned Revenue Cash To adjust for agreement cancellation Unearned Revenue

1,000 1,000

06/20/X1

1,000 1,000

Revenue
04/01/x1

06/20/x1

1,000

1,000

Scenario 4: Income Statement Approach 04/01/X1 Cash Revenue To record revenue Revenue Cash Agreement cancelled Unearned Revenue
06/20/x1

1,000 1,000

06/20/X1

1,000 1,000

Revenue 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 Expenses Wages Equipment Supplies Cash basis income

$ 217,250 $ 70,000 13,000 76,000

159,000 $ 58,250

Cash basis revenues: Down Payment Final Payment Payment on wedding

92,000 35,250 90,000 $ 217,250

WWPS Income Statement For the Month Ending June 30, 20XX Revenues Services to customers Expenses Wages Depreciation Supplies Net income Accrual basis revenues: Revenue (92 x 2950) Expenses: Wages (12000-70000-23000) Supplies (123500+76000-81200) Depreciation (700000 / 50)

$ 271,400 $ 81,000 14,000 118,300

213,300 $ 58,100

$ 271,400 81,000 118,300 14,000 $ 213,300 $