In general when is revenue recognized
- in merchandising companies when merchandise is sold and delivered (point of sale)
- in service companies when the service is performed
Under ASPE revenue is recognized when:
- performance of an obligation is substantially complete
- revenue can be reliably measured
- collection is reasonably certain
Under IFRS when is revenue recognized
- when a company satisfies a performance obligation
What is the five step process to measure and report revenue:
- Identify the contract with the client of customer
- Identify the performance obligations in the contract
- determine the transaction price
- allocate the transaction price to the performance obligations in the contract
- recognize revenue when (or as) the company satisfies the performance obligation
Expenses are recognized when:
Due to ordinary activity, a decrease in future economic benefit occurs (decrease in an asset or increase in a liability)
When are expenses recorded
often recorded in the same period in which the revenues they helped produce are recorded
Describe the cash basis of accounting
- revenue is recorded only when cash is received
- expenses are recorded only when cash is paid
- can lead to misleading financial statements as revenue and expenses can be manipulated by timing the receipt and payment of cash
- in Canada only allowed for farming or fishing
Describe the Accrual basis of accounting
- revenue is recorded when earned, rather than when cash is received
- expenses are recorded when incurred, rather than when cash is paid
Adjustin entries can be categorized as
- prepayments: prepaid expenses and unearned revenues
- accruals: accrued revenues and accrued expenses
Describe prepayments
- Cash has been spent but the item acquired has not been used or consumed (pre paid expenses)
- cash has been collected but the revenue has not been earned (unearned revenues)
–> entry to cash has been recorded but its going to stay on the balance sheet because it hasn’t been used yet
Describe accruals
- revenue has been earned but not collected (accrued revenues)
- expenses were incurred, but not yet paid (accrued expenses)
- here the entry to cash has not yet been recorded!
income statements (revenue and expenses) and dividends close to what
close to retained earnings
what are considered temporary accounts
- all expense accounts
- all revenue accounts
- dividends account
what are considered permanent accounts
- all asset accounts
- all liability accounts
- all shareholder’s equity accounts
Describe the 9 steps in the accounting cycle
- analyze business transactions
- journalize the transactions
- post to general ledger accounts
- prepare a trial balance
- journalize and post adjusting entries (prepayments and accruals)
- prepare an adjusted trial balance
- prepare financial statements
- journalize and post closing entries
- prepare a post closing trial balance
