Accounting : Chapter 3

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  1. typical operating cycle activities
    • 1. buy goods/services
    • 2. pay cash to suppliers
    • 3. sell goods/services
    • 4. collect cash from customers
  2. operating time activities
    • difference for all business, the lenght of time for each step varies
    • for example, restaurant earn profit immediately while product profit pend till week-month
  3. revenue
  4. expense
  5. net income
    • revenue > or = expense
    • measure a company success
    • indicate the amount by which shareholder equity increase
  6. net loss
    expense > revenue
  7. time period assumption
    • monthly, quarterly, and annually
    • shorter time to report will allow owner to find out about their business and take immediate step to become more profit
  8. balance sheet
    permanent account - take stock in point in time
  9. income statement
    temporary account - depict a flow over a period of time
  10. cash basis accounting
    • report revenue when cash is received and expenses when cash is paid (not allow in GAAP)
    • fine for managing personal finance not a business
    • does not determine the success of a business
    • use credit only rather than cash
  11. accrual basic accounting
    report revenues when they are earned and expenses when they are incurred regardless of timing of cash receipts or payments; required under GAAP
  12. rule on accrual
    financial effects of business activities are measure and reported when the activities actually occur, not when the cash related to them is received or paid
  13. 2 basic principle of accrual
    revenue principle and matching principle
  14. revenue principle
    record revenue when they are earned not necessarily when cash is received
  15. recognize
    measured and reported
  16. earned
    perform the acts of promise
  17. 3 conditions required for revenue to be recognize
    • 1. risk and rewards have passed
    • 2. measurability is reasonably certain
    • 3. collect ability is reasonably assured
  18. cash can be received
    • 1. same period as the good/services
    • 2. before they are provided - gift card/unearned revenue
    • 3. after they are provided - selling goods on account
  19. unearned revenue
    liability representing a company's obligation to provide goods to customers in the future
  20. matching principle
    under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them - advertise expenses when is running
  21. cash can be paid
    • 1. same time as the cost is incurred to generate revenue
    • 2. before the cost is incurred to generate revenue
    • 3. after the cost is incurred to generate revenue
  22. cash paid before
    will not be recorded till it has been use as expense, however is recorded as assets in the period brought - rent and insurance
  23. cash paid after
    report it as expenses in the current month - account payable
  24. increase/decrease in revenue/expense
    • (-DR) revenues (+CR)
    • (+DR) expenses (-CR)
  25. trial balance
    • internal report that lists all accounts and their balances to check on the equality of total recorded total debits and total credits records
    • prevent from making mistakes
    • debit=credit
    • T account
  26. unadjusted trial balance
    require several adjustment will have to be made at the end of the accounting period to update the account
  27. cash received before revenue is earned
    • before: (Dr)cash(+A) / (Cr)unearned(+L)
    • earn revenue: (Dr)unearned(-L) / (Cr)revenue(+R,+SE)
  28. cash received same time revenue is earned
    Same time: (Dr)cash(+A) / (Cr)revenue(+R,+SE)
  29. cash received after revenue is earned
    • revenue earned: (Dr)prepaid(+A) / (Cr)cash(-A)
    • after: (Dr)expense(+E,-SE) / (Cr)prepaid(-A)
  30. cash paid before expense is incurred
    • before: (Dr)prepaid(+A) / (Cr)cash(-A)
    • use up benefit: (Dr)expense(+E,-SE) / (Cr)prepaid(-A)
  31. cash paid same time expense is incurred
    same time: (Dr)expense(+E,-SE) / (Cr)cash(-A)
  32. cash paid after expense is incurred
    • use up benefit: (Dr)expense(+E,-SE) / (Cr)Account payable(+L)
    • after: (Dr)account payable(-L) / (Cr)cash(-A)
  33. capitalized cost
    • cost basis of a fixed assets (balance sheet)
    • incurred when building or financial fix asset
    • not expenses in the period they were incurred
    • recognized over a period of time as depreciation or amortization
    • recorded as asset
Card Set
Accounting : Chapter 3
Chapter 3 - Reporting Operating results on the Income Statement
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