CHAPTER 4: Equation Expanded To Show Operating Performance Flashcards
Effect of Recognizing Revenue
it increases owner’s equity and increases assets in cash (if immediately collected) or in accounts receivable (if not immediately collected).
Principle under Accrual Concept. Recognizes revenue when it is earned regardless of whether or not cash is immediately collected.
Revenue Recognition Principle
Principle under Accrual Concept. Recognizes expense when incurred regardless of whether or not cash is immediately paid.
Expense Recognition Principle
Effect of Recognizing Expenses
it decreases owner’s equity and decreases assets (if immediately paid or increases liability (if not immediately paid).
Expense is recognized when revenue is recognized because it is not possible to earn revenue without incurring expenses.
Matching Principle
Three ways of recognizing expenses in generating income
- Expense is recognized when revenue is recognized because it is not possible to earn revenue without incurring expenses. This is also called the Matching Principle.
- Resources or assets that will benefit the business over a number of years should be allocated or spread out as expenses over the years the asset will be used.
- Some expenses are regularly incurred such as salaries for service received from employees, rent for use of office space, and such.
Requires that assets, liabilities, revenues and expenses be recognized based on the time they relate or based on their occurrence rather than on whether cash is received or paid.
Accrual Concept
Recognizes Revenue only when cash is collected and Expenses are paid in cash.
Cash Concept
Factors that Increase Owner’s Equity
Contributions and Revenues
Factors that Decrease Owner’s Equity
Withdrawals and Expenses
The inflow of cash or other assets coming from a client or customer for service rendered or merchandise sold.
Income
Income comes from the normal course of business, such as amounts received by an airline or bus company from passengers for transportation services rendered.
Revenue
Account title used to describe revenue common to all servicers.
Service Income
Revenue tile used by merchandisers and manufacturers.
Sales
Effect of Revenue on Assets and Owner’s Equity
Increase in Assets, Increase in Owner’s Equity
Effect of Revenue on Liabilities and Owner’s Equity
Decrease in Liabilities, Increase in Owner’s Equity
The consumption of an asset or using up of service to generate revenue.
Expense
Effect of Expenses on Assets and Owner’s Equity
Decrease in Assets, Decrease in Owner’s Equity
Effect of Expenses on Liabilities and Owner’s Equity
Increase Liabilities, Decrease in Owner’s Equity
ENTRY: March 21, A tourist hired the services of the agency for a tour in Baguio. Cash of P15,000 was received from the tourist.
Increase in ASSETS: Cash P15,000
Increase in OWNER’S EQUITY:
Service Income P15,000
ENTRY: March 22, Cash was paid for the following: Gas and Oil, P500 and repair of car, P1,000.
Decrease in ASSETS: Cash P1,500
Decrease in OWNER’S EQUITY:
Repair Expense P1,000
Gas & Oil Expense 500
ENTRY: March 24, Mr. Gray hired the services of the agency for his visitors and promised to pay P16,000 on March 31.
Increase in ASSETS:
Accounts Receivable P16,000
Increase in OWNER’s EQUITY:
Service Income P16,000
ENTRY: March 25, Paid telephone bill for P500.
Decrease in ASSETS: Cash P500
Decrease in OWNER’S EQUITY: P500
ENTRY: March 27, The Faculty Club of Angelicum Academy hired the services of the agency tour in MAnila. A bill was issued to them for P20,000, 50% of which was collected.
Increase in ASSETS:
Cash P10,000
Accounts Receivable 10,000
Increase in OWNER’S EQUITY:
Service Income P20,000
ENTRY: March 30, Mr. Gray paid one hald of his account in cash.
INCREASE AND DECREASE IN ASSETS:
Cash + P8,000
Accounts Receivable -8,000
ENTRY: March 31, Paid for rental of office space, P10,000 and salaries of employees and workers P9,000.
Decrease in ASSETS: Cash P19,000
Decrease in OWNER’S EQUITY:
Rent Expense P10,000
Salary Expense 9,000
This represents the period of time it takes for the cash to be converted back into cash.
Operating Cycle
Statement that requires an entity to present income and expenses.
Statement of Comprehensive Income
Requires the preparation of this statement for a certain period of time. This summarizes the cash activities of the business.
Statement of Cash Flows
Three sources of company to obtain cash.
- The contribution of owner
- The loan from the bank
- From the operation of the business
Cash flows activities represent the increase in cash coming from owner’s contribution and from the amount borrowed from the bank against a cash decrease because of the owner’s personal drawings.
Financing Activities
Cash flows activities represents payments for the acquisition of assets.
Investing Activities
Include cash and cash equivalents that are not restricted in use, as well as other assets expected to be realized into cash, or sold or consumed within normal operating cycle of the business or one year.
Current Assets
In the form of plant, property, and equipment, long term investments, intangible assets and other assets.
Non-Current Assets
Debts or obligations reasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within a period of one year.
Current Liabilities
Long term liabilities or obligations that are payable longer than one year.
Non-Current Liabilities
