Ch9 - Chapter 9 Revenue Cycle: Sales, Receivables, and Cash...

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Chapter 9 Revenue Cycle: Sales, Receivables, and Cash E 9-1 Recording Sales and Cash Collection 1. Accounts Receivable 22,000 Consulting Revenue 22,000 To record revenue for consulting services. Cash 6,000 Accounts Receivable 6,000 To record the collection of cash in November. 2. Assets increased by $22,000 through providing services in November. 3. The collection of cash has no effect on assets because one asset increases while another asset decreases. E 9-2 Recording Sales and Cash Collection 1. Accounts Receivable 24,000 Consulting Revenue 24,000 To record revenue for consulting services. Cash 24,000 Accounts Receivable 24,000 To record the collection of cash. 2. Equation Increase/Decrease/No Effect Amount Assets Increase $24,000 = Liabilities No effect + Owners’ Equity Increase $24,000 E 9-3 Revenue Recognition In order to decide when revenue should be recognized, we must consider the following two revenue recognition criteria: Is the work done? Is the cash collected or collectible? Work done : The work is not done when James Dee signs the contract to do the job. If past history shows that the amount of free guarantee is not a large amount, then the work is done, or virtually done, when the job is completed. Cash collected or collectible : If past history shows that customers generally are reliable in paying, then we do not have to wait until the cash is collected 30 days after the job is completed before recognizing revenue. In summary, if past history shows that the free guarantee work is not significant and customers are fairly reliable in paying, then revenue should be recognized at the time job is completed,
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which is option (c). Because the work is guaranteed for five years, James Dee should also set up an Estimated Warranty account to recognize the future liability for re-cleaning jobs. E 9-7 Sales, Cash Collection, and Bad Debts Transaction Assets = Liabilities + Equity 1. Sales during year +2,500,000 No Effect +2,500,000 2. Cash collected on account No Effect No Effect No Effect 3. Establishment of allowance for bad debts
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This note was uploaded on 04/11/2009 for the course ACCT 410x taught by Professor Bonner during the Fall '06 term at USC.

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Ch9 - Chapter 9 Revenue Cycle: Sales, Receivables, and Cash...

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