>Q: I'm not sure I understand how to adjust for accured revenue (interest > and wages) and accrued expenses (it's more the revenue I don't get). > What is the definition for an accrued revenue? A: Accrued Revenue: Revenue which has been earned, but not yet received. For example, you might have a $1,200.00 savings bond which pays 10% interest a year. Furthermore, this bond may pay its interest only once a year. That would mean you would receive one lump payment of $120.00 a year. Now, the reason why we might want to perform an adjustment in this case is because the bond is actually EARNING revenue ALL YEAR LONG. Just because it pays us the interest only once a year doesn't mean that we shouldn't RECOGNIZE the revenue it is earning throughout the rest of the year. (If you break it down to a monthly basis, the bond is actually earning $10.00 a month.) So, what we can do for the 11 months prior to receiving the interest is record an adjusting entry like this: Debit Credit Jan. 31 Interest Receivable 10.00 Interest Revenue 10.00 (We would record the same entry for the NEXT 10 months.) Then, on the month that we actually receive the interest for the full year, we will record an entry like this: Debit Credit Dec. 31 Cash 120.00 Interest Receivable 110.00 Interest Revenue 10.00 The point to all this is to FAIRLY acknowledge the revenue earned by our business operations and business investments for EVERY month. If we recorded revenue ONLY when we actually RECEIVED the revenue, then some months might look like they didn't earn any revenue at all, while the month in which we received payment would appear to have earned far more revenue than it did. > Q: An accrued expense is an expense that occurred in one fiscal period but > for which payment is not due until another fiscal period? Is that right? A: Yes, basically. It is the same situation as the one outlined above, except it deals with expenses which have been incurred, but not yet paid. > Q: For an accrued wages expense. The one account effected would probably > be a credit to wages payable and the other one would be a debit to wages > expense. Is that right? A: Absolutely correct. > Q: What happens with the accrued revenue? Interest expense and wages > expense? A: All accrued revenues and expenses are treated the same. It doesn't matter what the specific revenue or expense might be. Basically, you acknowledge the revenue earned or the expense incurred by recording the appropriate amount within the expense account or the revenue account, then we acknowledge the same amount within an appropriate "payable" account. We then reverse the payable account once the amount is actually paid. >Q: Text pg. 183 Under 'Journal Entry for Bank Advice' is the 'Bank > Charges and Interest' account as asset or liability? Why > are charges and interest the same account? A: Actually, "Bank Charges and Interest" is an expense - something you spend money on, yet you receive no asset in return. This account records the interest we pay on loans, as well as charges for any other banking services. > Q: pg. 185 #8, A: A sales invoice usually refers to a credit purchase, whereas a Cash Sales slip refers to a cash sale. Thus, a sales invoice is an important source document which serves as a legal document outlining how much one party owes another party, as well as the terms of payment. > Q: #14, A: A cheque is not a source document because it is issued by the business itself. A source document is a document which provides the name, address, and contact information of ANOTHER party who can collaborate a business' story about a transaction that has taken place. In other words, a source document is proof of a transaction between two parties, and we can't go around manufacturing our OWN proof. > Q: #17, A: The company's payroll records. > Q: #24 A: An invoice has all of the information one would need to support the claim that a transaction took place. It outlines what was purchased, when, for how much, as well as who bought it and who sold it. > Q: pg. 186 #5 (section exercises) A: Section "exercises" or section "review questions"? >Q: pg. 193 #3 (it says on pg. 191 under 'The Purchaser' that "the > purchaser of goods does no accounting for provincial > retail sales tax" A: True. The purchaser will simply record the item "at cost" - a cost which includes PST. But the seller must account for the PST within a "PST Payable" account, becasue the seller must pass on this tax to the government at regular intervals. > Q: pg. 194 #5 (cash or charge?) A: One really couldn't tell, this looks like an error on the part of the book publisher. > Q: When you earn profit do you debit the 'Bank' account or do you credit a > revenue account? Is it to be based on balance between credit and debit? A: You do both! All transactions will result in a "double entry" to our books. A double entry refers to a debit entry to at least one account, and a credit entry to at least one other account. This is fully explained on pages 92 - 93 of your text. You are correct when you say that earning profit will result in a debit to your "bank" account and a credit to your "revenue" account. However, this would only be in the case where you were paid cash. Remember, you may sell your goods or services on credit, in which case you will debit your "accounts receivable" account and credit your "revenue" account. Remember also that your revenue account will usually be titled in a manner associated with your business activity. ie. If you sell goods, you will likely title your revenue account "Sales." If you are a lawyer, you will call it "Legal Fees Earned." Get the idea? > Q: On page 39 of the text, #5, is the financial position determined by > the equity alone or the total liabilities and equity? A: Another good question. Financial position can be increased in a variety of ways, depending on what one's goals are. In this case, Amy has increased her total assets from $4,415.00 to $4,555.00. This is one way that she has improved her financial position, because her business is worth more this month than it was last month. However, she managed to increase her assets WITHOUT increasing her debt - which is even better! Furthermore, she actually REDUCED her debt, which is most impressive. You see, it's easy to increase one's assets if they simply go further into debt, but if they can increase their assets without increasing their debt, then they are actually improving their equity in the company - and in the final analyses, this is the most critical question to ask related to financial position - "has the owner improved his/her equity in the company?" In the end, Amy has marginally imroved her equity in the company. Last month her equity ratio (the owner's equity expressed as a percentage of the total assets) was 96.6%, and this month it is 97.37% - that's not bad at all. The debt percentage is simply the reverse of the equity percentage, so if the equity ratio goes up, the debt ratio must go down. > Q: On page 40 'Communicate it' since Amy has cash $305.00 and the cost for > the trip is $350.00 she needs $45.00 which she can get from borrowing or > work to earn it. Is that right? A: Yes, that is correct. I would suggest that, as her parents want her to "contribute" $350.00 herself, then borrowing any money from her parents would be out of the question. That leaves EARNING the $45.00 as the only remaining possibility. > Q: Page 43 #6. A: A secured creditor is a creditor who has a legal claim in the assets of the borrower. The bank accomplishes this by making the borrower sign a contract that stipulates that the bank has a legal interest in specific assets which are presently owned by the borrower, ie. a house, car, land, etc. These assets will then become "collateral" for the loan. Other creditors, ie. Sears, Future Shop, etc, do not make their credit customers sign over personal assets as collateral for their credit accounts. > Q: Page 46 #2. The bank manager would need information on what is being > done to increase the A/R. Is that right? A: Actually, the bank manager should want to discover what the current worth of the equipment is and what plans the company has made to sell this equipment. > Q: Page 46 #6. My answer was that the Continuing Concern Concept and the > Principal of Conservatism influenced my previous answers for the > exercise. Is that correct? A: Well, the equipment is certainly not worth what the Balance Sheet is indicating. The Balance Sheet is showing what the equipment was purchased for, but it does not indicate the "depreciated" value of this equipment. This violates the "principle of conservatism" which states that we must always make efforts to not overstate the financial position of a business. > Q: Page 117 #2 A: This transaction would create a debit entry to the "A/R - V. Morris" account. It would also create a credit entry to the "Capital" account. However, (in just a few more pages in your text) you will learn that you would in fact credit a specific revenue account, such as "Professional Fees Earned." > Q: Pg. 118 #12 Sarah Jones could be a creditor or a debtor. We can't tell > from the information given. Is that right? A: Well, if you are looking at the ledger then you can tell whether she is a creditor or a debitor because the account will be listed under assets or liabilities. Furthermore, it will be titled either "A/R - Sarah Jines" or "A/P - Sarah Jones." However, if you are just "told" this information verbally, then you would have to inquire about whether Sarah is a creditor or a debitor. > Q: Pg. 161 (case 2) #1 He has to list all the expenses and not just give > the total expense amount. A: That is true. But the main problem is related to a concept which your text does not fully explain - so I'll fill in the gaps. You see, Doug recorded 60 different $300.00 annual memberships within this month's revenue figure. That means that $18,000.00 of the $25,000.00 eaned this month are actually for services that HAVE NOT BEEN RENDERED YET! This clearly violates the "Revenue Recognition Convention" (page 127) which states that you must actually EARN the revenue BEFORE you can record it. Now, this is the part that your text does NOT explain. How do you handle this situation? Well, you will need to create an account for the money which you have received, and yet NOT earned. This account will hold all the cash which people give you in advance, for services that you will perform later - such as a health club membership. If a year's membership costs $300.00, then each month is costing $25.00. Therefore, a $300.00 prepaid membership should first be recorded like this: Cash: Debit $300.00 Unearned Revenue: Credit $300.00 (This is a credit because it is actually a liability account! The company OWES $300.00 worht of services to the client.) As each month passes, the unearned revenue slowly becomes EARNED revenue, and thus becomes transferred to the standard revenue account, like this: Unearned Revenue: Debit $25.00 (...becuase one month's worth of services have been delivered, thus this portion of the debt has been paid.) Revenue: Credit $25.00 (...because now the company has ACTUALLY EARNED this amount of revenue.) > Q: How do you do #2 and what is #3? A: Consider how much money represented by the 60 annual memberships has actually been earned by the end of the first month. Record ONLY this amount. > Q: Pg. 162 #1. Is the answer: that Tom didn't receive $10 000 all in > August and that $3000 was received in June and July? A: The problem is this: neither the payments he would have recieved in June and July, nor the services that he had provided, would be reflected in his June and July Income Statements. It would appear that he had not earned a dime in June and July, yet we know that this is not the case. > Q: I was > wondering how it would be possible to know whether my homework > answers are correct or incorrect. A: Basically, we meet in the chat room to discuss the homework. Once we are in the chat room I will ask you to identify random figures within your solution, ie. the balance of the Capital account, the total assets, etc. If you give me the right answers, then I will know that they you completed the homework correctly. If you give me a wrong answer I will likely be able to determine where a mistake was made. Actually, this approach is not unlike the system I use within a conventional classroom setting.
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