Principles Of Accounting - Income Measurement

Front 1

THE MEANING OF "ECONOMIC" INCOME?

Back 1

Economic income represents an increase in the command over goods and services

Front 2

THE MEANING OF "ACCOUNTING" INCOME?

Back 2

(a) measurements tend to be based on historical cost determined by reference to an exchange transaction with another party (such as a purchase or sale)
(b) income represents "revenues" minus "expenses" as determined by reference to those "transactions or events."

Front 3

Revenues?

Back 3

Inflows and enhancements from delivery of goods and services that constitute central ongoing operations

Front 4

Expenses?

Back 4

Outflows and obligations arising from the production of goods and services that constitute central ongoing operations

Front 5

Gains?

Back 5

Like revenues, but arising from peripheral transactions and events

Front 6

Losses?

Back 6

Like expenses, but arising from peripheral transactions and events

Front 7

So Income?

Back 7

Income = Revenues + Gains - Expenses - Losses

Front 8

THE PERIODICITY ASSUMPTION?

Back 8

A periodicity assumption is made that business activity can be divided into measurement intervals, such as months, quarters, and years.

Front 9

Fiscal years?

Back 9

Fiscal years often attempt to follow natural business year cycles, such as in the retail business where a fiscal year may end on January 31 (allowing all of the Christmas rush, and corresponding returns, to cycle through). Note in the following illustration that the "2008 Fiscal Year" is so named because it ends in 2008

Front 10

Accrual basis accounting?

Back 10

Accrual basis accounting is reflective of measuring revenues as earned and expenses as incurred

Front 11

The periodicity assumption, why not just wait?

Back 11

Two reasons: first, you might wait a long time for activities to close and become measurable with certainty, and second, investors cannot wait long periods of time before learning how a business is doing. Timeliness of data is critical to its relevance for decision making

Front 12

REVENUE RECOGNITION?

Back 12

The basic conditions of revenue recognition are to look for both (a) an exchange transaction, and (b) the earnings process(production) being complete.
There is persuasive evidence of an arrangement, delivery has occurred (or services rendered), the seller’s price is fixed or determinable, and collectibility is reasonably assured.

Front 13

EXPENSE RECOGNITION?

Back 13

- Matching: Costs linked to the revenue.
- Allocation(Depreciation): There is no clear link between a cost and revenue item.
- Immediate: Costs cannot be linked to any revenue, and do not benefit future periods either

Front 14

Why ADJUSTMENTS TO PREPARE FINANCIAL STATEMENTS?

Back 14

# MULTI-PERIOD ITEMS
# ACCRUED ITEMS

Front 15

What are MULTI-PERIOD ITEMS?

Back 15

Exchange? yes Earning? no
Prepaid Expenses:
Prepaid Insurance
Prepaid Rent
Supplies
Depreciation
Unearned Revenue

Front 16

What is ACCRUED ITEMS?

Back 16

Exchange? no; Earning? yes
Unrecorded Expenses:
Accrued Salaries
Accrued Interest
Accrued Rent
Unrecorded Revenues:
Accrued Revenue

Front 17

What is PREPAID EXPENSES?

Back 17

Pay for goods and services in advance.
- Create a Prepaid expense asset.
- Adjustment: Debit portion of expense at period-end, Credit the prepaid expense asset.

Front 18

When should we make an adjustment?

Back 18

Adjustments should be made every time financial statements are prepared, and the goal of the adjustments is to correctly assign the appropriate amount of expense to the time period in question (leaving the remainder in a balance sheet account to carry over to the next time period(s)).

Front 19

How to make adjustment for DEPRECIATION?

Back 19

- Create a Accumulated Depreciation contra asset.
- Credit Accumulated Depreciation, Debit Depreciation Expense.

Front 20

What is Unearned Revenue?

Back 20

- Get monies but not product yet.
- Create a Unearned Revenue (liability)
- Debit cash and Credit Unearned Revenue.

Front 21

How to make adjustment for Unearned Revenue?

Back 21

- Record: Debit cash and Credit Unearned Revenue liability.
- Adjust: Debit portion of Unearned Revenue at period-end, Credit Revenue

Front 22

How to make adjustment for ACCRUED SALARIES?

Back 22

- Record: Credit Salary Payable liability, Debit Salary Expense.
- Adjust: Credit cash, Debit Salary Payable.

Front 23

What is income statement approach adjustment?

Back 23

- Record: expense or revenue
- Adjust: expense or revenue to repaid or accrued one.