Chap 2 Flashcards
are income generated
from the primary operations of the
business.
Revenue
are income derived from other
activities of the business.
Gains
Two kinds of expenses
Expenses, losses
are expenses related to the primary
operations of the business.
Expenses
from notes payable is not
part of the selling activities of the store. It is
classified as losses and other expenses.
Interest expense
Accrual states that:
revenue must be reported on the accounting period
that it was earned.
expenses must be reported during the same
reporting period they were incurred.
Expense Recognition
Matching Principles
Rational Allocation
Immediate Recognition
Expenses are “matched” and
recorded in the same period that the
revenue it generated was recognized
Matching Principle
The principle of rational allocation requires the cost
of long-term expenditure to be rationally allocated
throughout usage based on the expected pattern of
usage.
* An example of expenses estimated using rational
allocation is the depreciation of equipment
Rational Allocatiton
In cases when accountants cannot determine how
long the expenditure will benefit the business
or if there is any benefit at all, then conservatism
dictates that the cost of the expenditure should be
charged to the expense immediately.
Immediate Recognition
is generally used to describe
revenue derived from the rendering of services. Example:
* Rental Revenue
* Professional Fee; and
* Tuition Revenue
Service Income
is generally used to describe revenue
derived from selling goods. Example:
* Office Supplies Sales
* Book Sales
* Food Sales
Sales revenue account/ Sales
Revenue from sales of goods is recognized when goods have been delivered.
This is an account used by
companies that sell goods instead of services. For trading operations,
the COGS or the COS collects the cost of the merchandise sold. The cost
of unsold merchandise is reported as Inventory in the SFP. There are two
ways of keeping records of the inventory:
* Perpetual
* Periodic
Cost of goods sold (Cost of sales)
refer to all other expenses related to the
operation of the business, other than the cost of sales. These include
salaries of employees, supplies, utilities (electricity, telephone, and water
bills), gasoline expense, representation, bad debts expense,
depreciation, and amortization.
Operating Expense
Losses and other expenses as well as gains and other
income are reported after the operating section of
the SCI. Line items included under this section are:
- interest income from investments of excess cash,
- interest expense from borrowings, and
- gain or loss from the sale of equipment (proceeds
from sale less net book value of PPE on date of
sale).
This groups all revenue items together and
all expense items together.
It is called a single-step SCI because net
income is computed using only one step,
deducting total expenses from total
revenues.
Single-step Statement of
Comprehensive Income
The multi-step SCI is characterized by
the presentation of several subtotals
until net income is determined.
The multi-step approach is also
associated with the function of expense
format. The function of expense
classifies operating expenses into three
categories based on usage. The
categories are the cost of sales,
general and administrative expenses,
and selling expenses
Multi-step Statement of
Comprehensive Income
is a statement explaining some of the changes between
two Statement of Financial Positions (SFP) taken one year apart.
Income and expense are the general terms used to describe the
elements of the SCI;
SCI / Statment of comprehensive income.
refers to a transaction that increases assets and/or
decreases liabilities leading to an increase in equity resulting from
the operations of the business and not from the owner’s
contribution;
Income
are transactions that decrease assets and/or
increase liabilities leading to a decrease in equity resulting from the
operations of the business and because of distributions to owners.
Expense
are from other activities of the business.
Losses
