GAAP tells us when to record revenue and expenses.

Concept #1: Revenue Recognition Principle

Concept #2: Expense Recognition - The Matching Principle

Practice: From an accrual accounting perspective, label the following events as an expense or not an expense:

• An employee works all week for the company:

•The company pays the employee for the past two weeks of work:

•The company occupies a space for a month

•The company pays for a year’s worth of rent

Practice: A company has provided you with the following information about January’s income.  If the company uses a cash basis of accounting, what is their net income for the month of January?

Practice: If the company uses an accrual basis of accounting, what is their net income for the month of January?

Additional Problems
Which of these items would be accounted for as an expense? a. Repayment of a bank loan. b. Dividends to stockholders. c. The purchase of land. d. Payment of the current period's rent.
Palm Beach Motel accepts advance telephone reservations for rooms during its summer tourist season, but requires a 20% cash deposit by June 1. The realization principle indicates that the room rental revenue from these guests should be recognized in the period that the: a. Telephone reservation is received. b. 20% deposit is received. c. Guests stay in the motel. d. 80% balance is collected.
On April 1, Hudson Company received and paid a $700 bill for advertising done in March. In addition to this bill, the company paid $6,100 during April for expenses incurred in that month. On May 2, Hudson Company paid a $4,600 payroll to employees for work done in April. Based on these facts, total expenses for the month of April were: a. $6,100. b. $6,800. c. $10,700. d. $11,400.
Tom's Wear purchased plain T-shirts and printed logos on the T-shirts in January. The T-shirts were sold to customers in February. Tom's Wear received the final cash payments in March. According to the realization principle, when should revenue be recorded? A. January B. February C. March D. record revenue in both February and March E. record revenue in January, February, and March
Jorge receives a gas bill for $200 on 9/28, which will be paid on 10/15, and he makes the correct adjusting journal entry. What accounting principle is he following? A. Historical Cost B. Revenue Recognition C. Matching Principle D. Conservatism
Revenue is recorded when A. Cash is collected B. When its earned C. When its earned and cash is collected D. As long as evidence of arrangement exists
The following information pertains to Sooner Company: May 1     Customer ordered an installation service to be performed on May 15 May 2     Customer paid cash for the installation May 8     Sooner purchased the necessary supplies on account to complete the installation May 15   Installation was started and completed May 20   Sooner paid for the supplies When would the company record the expense related to the supplies? a) May 2. b) May 8. c) May 15. d) May 20.
Consider the following events for B Company: June 1     Purchased gasoline for $200 on account June 7     Advertised lawn mowing for $100 per lawn June 9     Signed up 8 customers and received $800 in cash June 12   Mowed 8 lawns, using up all the gasoline purchased on June 1 June 13   Paid for the gasoline Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services? a) June 1. b) June 7. c) June 9. d) June 12.
Sales revenue is recognized in the period in which: a) Merchandise is delivered to the customer. b) The customer orders the merchandise. c) Cash payment is received by the seller. d) Purchases are made to replace the merchandise sold.