Chapter 3 ACCT 2010 (Accounting, Dr. Kohlmeyer)
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ACCT 2010 (Accounting, Dr. Kohlmeyer)
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This 3 page Class Notes was uploaded by Catherine Feeney on Wednesday September 23, 2015. The Class Notes belongs to ACCT 2010 (Accounting, Dr. Kohlmeyer) at Clemson University taught by Dr. Kohlmeyer in Fall 2015. Since its upload, it has received 62 views. For similar materials see Financial Concepts in Accounting at Clemson University.
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Date Created: 09/23/15
Revenue Expenses Net Income Operating Activities day to day operation cost of a business These daytoday operating activities will determine whether the company makes a profit Operating activities are the primary source of revenues and expenses and thus can determine whether a company earns a profit or incurs a loss Revenues are the amounts a business charges its customers when it provides goods or services Expenses are costs of operating the business incurred to generate revenues in the period covered by the income statement Net income is calculated by subtracting expenses from revenues Time period Assumption a company is going to stay in business inde netly but we need to pick a time period that their gonna report their revenue and expense Weekly monthly yearly ect Def niton The assumption that allows the long life of a company to be reported in shorter time periods When you go to the bank for a loan the bank with most likely want at least two years of recorded operating activities The revenues and expenses on an income statement report the financial impact of activities in just the current period whereas items on a balance sheet will continue to have a financial impact beyond the end of the current period Balance sheet accounts are considered permanent whereas income statement accounts are considered temporary Another way people describe this difference is that the balance sheet takes stock of what exists at a point in time whereas the income statement depicts a flow of what happened over a period of time Balance Sheet Assets Liabilities Stockholders Equity Account on the balance sheet are permanent accounts Which means we are going to carry the balance to the next period record These balances are never going to get closed out They build off each other from record to record Income Statement Revenue and Expenses Temporary Accounts because you just want to know your revenue and expenses Temporary Accounts are just opened from the time period and then they are zeroed out Accrual Accounting vs Cash Basis Accounting Cash Basis says that we are not going to recognize any revenues until we receive the cash from the customer We are not going to recognize any expenses until we pay them De nition Recording revenues when cash is received and expenses when cash is paid Accural Accounting Recording revenues when earned and expenses when incurred regardless of the timing of cash receipts or payments The rule of accrual is that the financial effects of business activities are measured and reported when the activities actually occur not when the cash related to them is received or paid That is revenues are recognized when they are earned and expenses when they are incurred Revenue Recognition 1 revenue is earned when the cash iS received on the spot Revenues are recorded when goods or services are delivered there is evidence of an arrangement for customer payment the price is xed or determinable and collection is reasonably assured Three Types 1 Cash before saleservice Airlines magazine publishers insurance companies and retail stores routinely receive cash before delivering goods or services 2 Cash with saleservice Cash sales are common for companies selling to consumers For example Domino39s Pizza collects cash within moments of delivering pizza to a customer 3 Saleservice before and cash after This situation typically arises when a company sells on account Selling on account means that the company provides goods or services to a customer not for cash but instead for the right to collect cash in the future Expense Recognition Principal Matching Principle The business activities that generate revenues also create expenses Under accrual basis accounting expenses are recognized in the same period as the revenues to which they relate not necessarily the period in which cash is paid for them for all revenue generated in a period we need to match those with the expenses that occurred Term Expense Recognition Principle Expenses are recorded when incurred in earning revenue also called quotmatchingquot Expense Recognition 1 Cash before expense 2 Cash with expense 3 Expense before cash after