Vintage Test for you !!

The February transaction records the payment for rent. Prepaid Rent is an example of a prepaid expense account. A Prepaid Expense is an asset account that identifies a resource that has been paid for but not
used. The purchase is an asset because a resource has been acquired that will be used in the future. The
March transaction records use of the resource. The expense should be recognized in March, when the resource is consumed, rather than in February when cash is paid. The expense has been deferred from the time of the payment to March, when the building is used. (more…)

In addition to recognizing expenses at the time cash is paid, expenses may also be accrued or deferred. Accrued expenses result when expenses are recognized prior to the payment of cash. Deferred expenses result when expenses are recognized after the payment of cash. (more…)

Unearned Revenue is an account used to link the receipt of cash in February with the revenue earned in March. This time, cash was received before revenue was recognized. Like Accounts Receivable, amounts are added or subtracted from Unearned Revenue as needed to ensure the proper timing of revenue recognition. The net result of these transactions is the same as if goods were sold for cash. (more…)

Cash increases by the amount received from the customer. Revenue has not been earned, however, because goods have not been transferred to the customer. Instead, Moms Cookie Company has incurred a liability as represented by the Unearned Revenue account. Unearned Revenue is a liability account that results when a company receives cash from a customer for goods or services to be provided in the future. The liability results from the obligation Moms Cookie Company has to order the goods and provide them to the customer. If the company fails to complete the obligation, it will be required to refund the $3,000 to the customer. (more…)

Cash increases because it has been received from the customer. Accounts Receivable decreases because the customer has fulfilled the obligation to pay for the goods sold in February. Revenue is not recognized at the time cash is received because it has already been recognized when goods were sold. Because the sale occurs at one time and cash is received at a different time, two transactions are needed to record the sale and cash receipt. Accounts Receivable provides a means of linking the two transactions. It records the amount the customer owes the company until the customer pays for the goods. Exhibit 1 describes the effect of the transactions on the Cash, Accounts Receivable, and Sales Revenue accounts. (more…)

How do we know how much profit our business has earned?

With their accountants help, Maria and Stan set up an accounting system for recording the business activities of Moms Cookie Company. They prepared financial statements for January from information recorded in their accounting system. However, certain types of transactions were not considered in preparing those statements. A business requires an accounting system that ensures that all revenues and expenses are recorded in the appropriate fiscal period. (more…)

These types of transactions are common for most companies. To accommodate these types of events, businesses use a form of accounting known as accrual accounting. Accrual accounting is a form of accounting in which revenues are recognized when they are earned and expenses are recognized when they are incurred. To recognize revenues and expenses means to record them as accounting transactions. Normally, revenues are earned when goods are transferred or when services are provided. Expenses are incurred when resources are consumed in the processes of acquiring and selling goods and services. Accrual accounting focuses on business activities to determine when to record revenues and expenses. (more…)