Revenue & Expense Flashcards
Revenue Recognition Steps
1- Identify the contracts with a customer
#2 Identify the performance obligations in the contract
#3 Determine the transaction price
#4 Allocate the transaction price to the performance obligations in the contract.
#5 Recognize revenue when (or as) the entity satisfies a performance obligation
- Performance Obligation satisfied “over time”
- Performance obligation satisfied at a “point in time”
Contract Assets
When right to receive consideration in exchange of goods and services is contingent upon something except passage of time contract assets would be recorded.
The entity would record a contract asset against revenue and a receivable will be recorded only when the right becomes unconditional.
Contract asset Debit
Revenue Credit
Receivable Debit
Contract Asset Credit
Contract liability
When consideration has been received in advance, but goods or services have not been provided Contract liability would be recorded.
Consideration received in advance is recognized as contract liability until goods or services have been provided.
Cash Debit
Contract liability Credit
Contract Liability Debit
Revenue Credit
Warranty
Warranty is a clause that if the product doesn’t serve as it is supposed to the defective product will be repaired free of cost or can be exchanged for a functioning one.
Two types of warranty clauses
- Warranty is purchased separately. Example Apple Care
- Warranty is not purchased separately but is a part of the product sold. Example: Apple limited warranty
Sale with right to return
- Entity will transfer the control of the product to the customer and will also give the customer the right to return the product in case the customer is dissatisfied for a new product or refund.
-Revenue would be recognized only for the products not expected to be returned and an allowance for return would be created for products expected to be returned.
- Cost of Goods Sold would also be recognized only for the products not expected to be returned and an asset would be recognized for products expected to be returned.
Consignment sales
- A Consignment sale is a type of sale in which a consignee, sells goods on behalf of the consignor.
- Accounting
- the consignor should not recognize revenue from the sale of the goods until they are sold to the customer by the consignee.
- UNsold inventory at the consignees place would be included as a part of the consignors inventory.
- Freight expenses when shipping to the consignee are not considered freight-out rather it is freight-in and therefore included as a part of the inventory. Warehousing cost by consignee and in-transit insurance is also capitalized to inventory.
Bill & Hold Agreement
- BIll and hold agreements are those contracts under which entity bills the customer for the product but retains physical possession of the product until a future date for the convenience of the customer.
- Revenue will be recognized for such bill & hold contracts only when control of the product is transferred to the customer. Control is different than possession.
- Control is transferred when all the following conditions are satisfied:
- Customers commitment to the purchase
- Substantive reason for the bill-and -hold arrangement
- Product must be identified separately as belonging to the customer
- Product must be ready for physical transfer
- Seller cannot use or direct the product to another customer.
Revenue Recognition for Licensing Agreements
-Licensing establishes a customer right to an intellectual property.
- License can be granted for intellectual properties such as software, patent, trademarks, copyrights, artworks, music.
- Intellectual property are of two types:
- Symbolic intellectual property
-No significant standalone utility - all the utility is derived from its association to entity’s past and ongoing activities.
-License grants the customer the “right to access” the IPR and the changes in the IPR for a period of time. - Revenue is recognized over time.
-Functional intellectual property
* Has significant standalone utility
* All of the utility is derived from the past activities already done.
* License grants the customer the “right to use” the IPR as it stands in a particular point in time.
* Revenue is recognized at a point in time.
Accounting for Gift certificates
-Entities sale of gift cards or gift certificates which can later be redeemed for goods and services.
Journal entry: Sale of gift certificate or gift card:
Cash Debit
Unearned Revenue Credit
Journal entry: Redemption of Gift card
Cash Debit
Unearned Revenue Debit
Revenue Credit
Journal entry: Lapse of gift card
Unearned Revenue Debit
Revenue Credit
Expense recognition
-Matching principle Expenses are matched to the period in which we receive benefit out of those expenses.
- In the absence of a direct association with specific revenues, certain expenses are recognized and recorded in an attempt to allocate them systematically and rationally between the periods during which benefits are provided.
- Some costs are linked as expenses to the current accounting period.
Prepayment (Deferred Expense)
- A prepaid expense is an expense that has been paid in advance but has not yet been used or consumed.
- Prepaid expenses are recorded on a company’s balance sheet as current assets since they represent a future benefit that the company has already paid for.
Accounting
- During the year: all expenses paid during the year are charged to expense irrespective of whichever year it pertains to.
Expense Debit
Cash Credit
- End of year (adjusting entry) At the year end, we would record adjusting journal entries to remove expenses paid in the current year that pertain to future years and record a prepaid expense.
Prepaid Expense Debit
Expense Credit
-Next year: expense for the current year paid in the prior year was recorded as prepayment. This prepayment would be recorded as an expense in the following year.
Expense Debit
Prepaid Expense Credit
Accrued Expense
- An accrued expense is an expense that has been incurred but not yet paid or recorded.
- Accrued expenses are recorded on a company’s balance sheet as current liabilities since they represent a future obligation that the company has not yet paid.
Accounting
- During the year: All expenses paid during the year are charged to expense irrespective of whichever year it pertains to. As the current years expense hasn’t been paid in the year, no expense was charged to the income statement during the year.
No entry
- end of the year: (adjusting entry) When cash for current year expense is not paid in the current year but will be paid in future years, the expense should be recognized in the current year and an accrued expense should be created.
Expense Debit
Accrued Expense Credit - Next year: Expense for the prior year which was not yet paid was recorded as accrued expense last year. When this expense for the prior year will be paid in future years, future years’ expenses will be increased.
Expense Debit
Cash Credit
-To adjust this an adjusting entry in a future year will be created by which expense is reduced and accrued expense which is a liability is written off>
Accrued Expense Debit
Expense Credit
Accrued Income
-Accrued income is income that has been earned but has not yet been received.
- Accrued income is recorded on company’s balance sheet as a current asset until the income is received.
Accounting
- During the year-All the income received during the year is credited to income irrespective of whichever year it pertains to. As the current year’s income hasn’t been received in the year, no income was recognized in the income statement during the year.
NO ENTRY
- end of year- (adjusting entry)- When cash for current year income is not received in the current year but will be received in future years, income should be recognized in the current year and an accrued income should be created.
Accrued Income Debit
Income Credit
Next year- Income for prior year which was not yet received was recorded as accrued income last year. When this income for the prior year will be received in cash in a future year, future year income will be increased.
Cash Debit
Income Credit
TO adjust this an adjusting entry in a future year will be created by which income is reduced and accrued income which is an asset is written off.
Income Debit
Accrued Income Credit
Deferred Income
-Deferred income, also known as deferred revenue, is income that has been received by a company but has not yet been earned.
-accrued income is recorded on a company’s balance sheet as a current asset until the income is received.
Accounting
-During the year- All the income received during the year is credited to income irrespective of whichever year it pertains to.
Cash Debit
Income Credit
-end of year (adjusting entry)- At the year end, we would be adjusting journal entries to remove income received in the current year which pertains to future years, and record a deferred income.
Income Debit
Deferred Income Credit
Next year- Income for the current year received in the prior year was recorded as deferred income. This deferred income would be recorded as income in the following year.
Deferred Income Debit
Income Credit
Expense Cash- Accrual Conversion
Expense
