Exam 2, ch. 4-5 Flashcards
Ch. 4-5
Revenue recognition principle
Revenues are recognized in the accounting period in which the performance obligation is satisfied
Expense recognition principle
Expenses are matched with revenues
Accrual-basis accounting
Transactions that change a company’s financial statements are recorded in periods in which the events occur
Cash-basis accounting
Companies record revenue when they receive cash (not in accordance with GAAP)
Adjusting entries
Ensure that the revenue recognition and expense recognition principles are followed; every adjusting entry includes one income statement and one balance sheet account
Deferrals
Prepaid expenses, unearned revenues
Accruals
Accrued revenues, accrued expenses
Prepaid expenses
Expenses paid in cash before they are used or consumed; costs that expire either with the passage of time or through use
Deferrals: supplies
Dr. Supplies expense Cr. Supplies
Deferrals: prepaid insurance
Dr. Insurance expense Cr. Prepaid insurance
Accumulated depreciation
Contra asset account
Deferrals: depreciation
Dr. Depreciation expense Cr. Accumulated Depreciation
Book value
The difference between the cost of any depreciable asset and its related accumulated depreciation
Deferrals: unearned service revenue
Dr. Unearned service revenue Cr. Service revenue
Accruals: accrued revenues
Dr. Accounts receivable Cr. Service Revenue
Formula for computing interest
Face value of note x Annual interest rate x Time in terms of one year = Interest
Accruals: accrued interest
Dr. Interest expense Cr. Interest payable
Accruals: accrued salaries
Dr. Salaries and wages expense Cr. Salaries and wages payable
Closing entries
Dr. Service Revenue Cr. Expenses Cr. Retained Earnings Cr. Dividends
Merchandising company
Sells merchandise rather than performs services
Retailers
Merchandising companies that sell directly to consumers
Wholesalers
Merchandising companies that sell to retailers
Perpetual inventory system
Records continuously show inventory on hand
Periodic inventory system
Cost of goods sold is determined at the end of the accounting period
Periodic COGS
Cost of goods on hand beg. + Cost of goods purchased - Cost of goods on hand end.
Journal entry: purchase of merchandise perpetual
Dr. Inventory
Cr. Accounts Payable
FOB shipping point
Buyer pays freight costs
FOB destination
Seller pays freight costs
Journal entry: freight costs incurred by buyer perpetual
Dr. Inventory
Cr. Cash
Journal entry: freight costs incurred by seller perpetual
Dr. Freight-out
Cr. Cash
Journal entry: purchase returns perpetual
Dr. Accounts Payable
Cr. Inventory
2/10 n/30
2% discount if paid within 10 days, otherwise must be paid within 30 days
Journal entry: purchase discounts perpetual
Dr. Accounts Payable
Cr. Cash
Cr. Inventory
Journal entry: sale of merchandise perpetual
Dr. Accounts Receivable
Cr. Sales revenue
Dr. Cost of goods sold
Cr. Inventory
Journal entry: sales returns perpetual
Dr. Sales Returns and Allowances
Cr. Accounts Receivable
Dr. Inventory
Cr. Cost of goods sold
Sales returns and allowances, Sales discounts
Contra revenue accounts
Journal entry: sales discounts perpetual
Dr. Cash
Dr. Sales discounts
Cr. Accounts receivable
Multiple-step income statement
- Net sales - COGS = gross profit
- Gross profit - operating expenses = income from operations
- Add/subtract results of activities not related to operations = net income
Other revenues and gains
Interest revenue, dividend revenue, rent revenue, gain from the sale of PPE
Other expenses and losses
Interest expense, casualty losses, loss from the sale or abandonment of PPE, loss from strikes by employees and suppliers
Cost of goods sold (periodic)
Beginning inventory
+ Cost of goods purchased
= Cost of goods available for sale
- Ending inventory
= Cost of goods sold
Gross profit rate
Gross profit / Net sales
Purpose of gross profit rate
Measures the margin by which selling price exceeds cost of goods sold
Purpose of profit margin
Measures the extent by which selling price covers all expenses
Profit margin
Net income / Net sales
Journal entry: purchase of merchandise periodic
Dr. Purchases
Cr. Accounts payable
Journal entry: freight costs periodic
Dr. Freight-In
Cr. Cash
Journal entry: purchase returns and allowances periodic
Dr. Accounts payable
Cr. Purchase returns and allowances
Journal entry: purchase discounts periodic
Dr. Accounts payable
Cr. Purchase discounts
Cr. Cash
Journal entry: sale of merchandise periodic
Dr. Accounts receivable
Cr. Sales revenue
Journal entry: sales returns and allowances periodic
Dr. Sales returns and allowances
Cr. Accounts receivable
Journal entry: sales discounts periodic
Dr. Cash
Dr. Sales discounts
Cr. Accounts receivable
