ACCT 240 004 September 6 2013 Operating cycle Operating Decisions and Income Statement Begins at Purchase or manufacture of products or supplies on credit Pay suppliers Deliver Product or provide service to customers on credit Receive payment from customers Repeat from beginning Elements of Income Statement Revenues Increases in assets or settlement of liabilities from ongoing operations Expenses Decreases in assets or increases in liabilities from ongoing operations Gains Increases in assets or settlement of liabilities from peripheral transactions Losses Decreases in assets or increase of liabilities from peripheral transactions All Operating Revenues and Expenses Operating Activities Central Focus of Business Other Items Peripheral activities not the main focus of the business Cash Basis Accounting Accrual Accounting Revenue is recorded when cash is received expenses when cash is paid Assets liabilities revenues and expense should be recognized when the transaction that causes them occurs not when the cash is paid or received This is the GAAP Generally Accepted Accounting Principles Revenue Principles Recognize revenues when Delivery has occurred or services fulfilled There is persuasive evidence of an arrangement for customer payment The price is fixed or determinable Collection is reasonably assured If cash is received before the company gives the goods or services The account unearned revenue comes into play which is a liability credit matching the amount of cash paid a debit When the company delivers the goods or services unearned revenue is reduced and revenue is recorded When cash received Cash Debit Unearned Revenue Credit When company delievers Unearned revenue debits Revenue Credits which falls under retained earnings shareholder equity When cash received at same time that product or serve given Debit cash credit Revenue When Product delivered before cash comes in Accounts receivable debits Revenue Credits When cash then collected Cash debits Accounts receivable credits Examples Book page 110 part a Papa Johns sells 32k worth of food for cash Cash A Debits 32k Revenues R Credits 32k Book page 110 part b Cash debits 625 FFee Rev Credits 400 Unearned Rev 225 Part C Now they Debit cash 2750 Credit Accounts Receivable 750 Credit FF Revenue 2000 Part D Debit cash 20k Debit Accounts Receivable 10k Credit Revenue 30k In December they had done Accounts receivable for 750 and FFee credits for 750 Part E In December Debit Accounts receivable 1200 Credit Revenue 1200 In January Debit Cash 1200 Credit A C Pg 138 M3 3 a Debit cash 13k b Debit cash 3k Debit A R 4k c June Debit A r 2 5k July Debit cash 2 5k Credit Revenues 13k Credit Revenue 7k Credit Revenue 2 5k Credit A r 2 5k d Debit cash 2 6 Credit Unearned Revenue 2 6k Pg 141 E3 3 a Debit cash 11 98k Credit Unearned Revenue 11 98k b Debit Notes Receivable 1200 Credit cash 1200 In this month earned Debit Interest Receivable 12 Credit Rev 12 c Debit Cash 18 050 Credit Revenue 18 050