Revenue + Expenses

Question 1

Revenue recognition criteria

Answer 1

Revenue is recognized when both:

1. It is earned (goods and services are provided)
2. It is realized (payment is received or something that can be converted to known amount of cash (either a dollar amount of a time period in which to pay

Question 2

Realizing vs. recognizing revenue

Answer 2

Example: $100 received by software company for services to be provided over a period of time.

Dr. Cash (+A) $100
Cr. Revenue (+R, +SE) - $80 goods/services provided today. Payment received (Realized) AND goods and services provided.
Cr. Unearned Software Revenue (+L) $20 (payment received (Realized) but goods/services not provided yet

Unearned Software Revenue is a liability account to bridge this gap

Question 3

Expense matching principle

Answer 3

Expenses are recognized in the same period as the revenue they helped generate. Either/or:

1. The related revenue is recognized (product cost)
2. Incurred, if difficult to match with revenue (period cost / unusual event)

Question 4

Journalizing sales from inventory

Answer 4

Dr. Cash (+A) 35,000 (amt received from customer)
Cr. Sales (+R, +SE) 35,000 (reflects markup on inventory)

AND

Dr. COGS (+E, -SE) 30,000 (amt of inventory used up in this sale)
Cr. Inventory (-A)

Anytime you sell inventory, you need one JE for Cash/Revenue and one JE for COGS/reduction of inventory. The COGS one is what gets it on the books as an expense!!!

Question 5

What is an expense?

Answer 5

The cost of generating revenue

Question 6

When do we use the Inventory account

Answer 6

We only use Inventory for goods we buy with the intention to sell as quickly as possible at a mark up

Question 7

Which of these transactions would produce $10,000 of expenses in December? (check all that apply)

1. BOC signs a contract in December to buy $10,000 of copper.
2. BOC uses copper to make batteries at a total cost of $10,000 in December.
3. BOC sells batteries costing $10,000 in December for $12,000 cash.
4. BOC buys $10,000 of copper in December.
5. BOC sells batteries costing $8,000 in December for $10,000 cash.

Answer 7

1. Nothing has happened here. It’s not a liability, b/c no benefits or services received in past. Not an expense b/c based on matching principle, no revenue (that it helped generate) to match it to.
2. I think this is just moving it from one inventory (unfinished goods) to another (goods in process or finished goods).
3. This is our winner! Expenses are matched to revenue.:
   Dr Cash (+A) 12,000
   Cr. Sales (+R, +SE) 12000

Dr COGS (+E, -SE) 10,000
     Cr Inventory (-A)           10,000

4. This is just cash going out. Not an expense b/c not tied to revenue. 
         Dr Inventory (+A) 10,000
                Cr Cash (-A)               10,000

5. Same as #3 above. Should have selected this one. It’s an expense because COGS is an expense (a product cost).