Chapter 3 - Chapter 3 Reporting Operating Results on the...

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Unformatted text preview: Chapter 3 Reporting Operating Results on the Income Statement Learning Objectives 1. Describe common operating transactions and select appropriate income statement account titles. 2. Explain and apply the revenue and matching principles. 3. Analyze, record, and summarize the effects of operating transactions, using the accounting equation, journal entries, and T-accounts. 4. Prepare an unadjusted trial balance. 5. Describe limitations of the income statement. Operating Activities Operating activities include buying goods and services from suppliers and employees and selling goods and services to customers and then collecting cash from them. Income Statement Accounts Revenues are increases in a companys resources created by sales of goods or services to customers during the period. Expenses are resources used up by the entity to earn revenues. Net income is the excess of revenues over expenses. Accounting Accrual Basis vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Not GAAP Not GAAP Revenues, and expenses should be recognized Revenues, and expenses should be recognized when the transaction that causes them occurs, when the transaction that causes them occurs, not necessarily when cash is paid or received. not necessarily when cash is paid or received. Required by - G enerally A cceptable A ccounting P rinciples Accrual Accounting Accrual Accounting To do a good job of accrual accounting, we must be careful on: Revenue Recognition: revenue principle When and how to record revenue? Revenues are earned when goods or services are provided to customers at a determined price and with reasonable assurance of collection . Expense Recognition: matching principle When and how to record expenses? Expenses are incurred when the economic benefits of an item are used up in the current period, resulting in a decrease in the companys resources. Accrual Basis Accounting The revenue principle is a concept that requires that revenues be recorded when they are earned, rather than when cash is received for them. The matching principle is a concept that requires that expenses be recorded in the period in which they are incurred to generate revenue, rather than the period in which they are paid. Revenue Principle If cash is received before the company delivers If cash is received before the company delivers goods or services, the liability account goods or services, the liability account UNEARNED REVENUE UNEARNED REVENUE is recorded....
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Chapter 3 - Chapter 3 Reporting Operating Results on the...

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