Week Two Exercise Assignment: Revenue And Expenses Recogniti

Week Two Exercise Assignmentrevenue And Expenses1recognition Of Conce

Consider the following accounting tasks: classifying certain items related to revenue recognition, understanding the closing process for accounts, analyzing adjusting entries, preparing bank reconciliations, calculating uncollectible accounts, and evaluating receivables. Provide detailed explanations, journal entries, calculations, and analyses for each scenario described, demonstrating knowledge of accrual accounting, adjusting entries, and internal controls.

Paper For Above instruction

Effective revenue recognition, the closing process, adjusting entries, bank reconciliations, and receivables management are fundamental components of accounting. This paper explores each of these aspects in depth, illustrating their application through practical scenarios and demonstrating how they interconnect within the financial reporting system.

Recognition of Revenue and Expenses

Jim Armstrong’s company operates in the entertainment booking industry, and classifying items correctly is essential for accurate financial statements. The items include interest owed on a bank loan, professional fees earned but not billed, office supplies on hand, advance payments from clients, partial payments, prepaid insurance, bank loans payable, and repairs incurred. These should be classified based on their recognition timing and nature.

Interest owed but not paid, professional fees earned but not billed, and repairs incurred fit into accrued expenses and accrued revenue categories. Office supplies on hand reflect a prepaid expense, and advance payments fall under unearned revenue until earned. Prepaid insurance is a typical prepaid expense, and the bank loan payable is a liability, not directly related to revenue or expenses. Correct classification ensures the financial statements accurately reflect the company’s financial position and performance.

The Closing Process

The analysis of accounts such as Note Payable, Accumulated Depreciation, Accounts Payable, Product Revenue, Cash, Accounts Receivable, Supplies Expense, and Utility Expense reveals their roles during and after the closing process. Accounts like Cash, Accounts Receivable, and Product Revenue appear on the post-closing trial balance, as they are permanent accounts. Temporary accounts like Supplies Expense and Utility Expense generate a debit to Income Summary during closing and are closed to the capital account. Recognizing which accounts are closed is vital in preparing accurate financial statements and ensuring proper period-end procedures.

Adjusting Entries and Financial Statements

In the case of Sally Corporation, adjusting entries relate to unearned revenue, accrued expenses, prepaid expenses, and supplies. Half of the advance payment earned, services provided but not billed, unpaid salaries, supplies depletion, rent prepayment, and insurance premiums require adjustments to match revenues and expenses to the correct period, following the accrual basis of accounting.

For each case, the adjustment type (A-D) and corresponding journal entries are identified, and their impact on net income is discussed. For instance, recognizing earned revenue from a previously unearned amount increases revenue; accruing unpaid salaries increases expenses; adjusting supplies reflects actual usage; and amortizing rent and insurance prepayments ensures accurate expense recognition. Proper adjustments are crucial for reliable financial reporting.

Bank Reconciliation and Entries

Palmetto Company’s bank reconciliation involves reconciling the bank statement balance with the company's ledger. Adjustments for deposits in transit, outstanding checks, bank fees, interest earned, NSF checks, and note collections are necessary. The reconciliation is prepared by adjusting both the bank and book balances to match. The subsequent journal entries record bank charges, interest income, collection of notes, NSF checks, and corrections to the company's books, maintaining accurate and complete records.

Direct Write-Off Method for Uncollectibles

Harrisburg Company’s direct write-off method involves recognizing bad debt expense only when accounts are deemed uncollectible. Writing off Tom Mattingly’s account requires a debit to Bad Debt Expense and a credit to Accounts Receivable. While simple, this approach may distort financial statements because it does not match expenses to the period revenues were earned. Since it does not align with GAAP’s matching principle, it may understate receivables’ net realizable value at year-end.

Allowance Method and Receivables Analysis

For Sonic Sound, estimating uncollectible accounts involves aging receivables to determine expected losses. By applying the percentage of uncollectibility, we estimate the allowance for uncollectible accounts and compute uncollectible accounts expense for 20X2. Calculating net realizable value at year-end shows the true value of receivables on the balance sheet. Although closing the credit evaluation department sped up sales, it potentially increased credit risk, emphasizing the importance of effective receivables management.

Conclusion

Mastering these accounting processes ensures accurate financial statements and internal control. Recognizing revenue and expenses on time, performing proper closing procedures, preparing precise adjustments and reconciliations, and managing receivables effectively are vital skills for accountants. Proper application enhances financial transparency, aids in decision-making, and ensures compliance with accounting standards.

References

  • Boynton, W. C., & Johnson, R. N. (2019). Modern Auditing & Assurance Services. Cengage Learning.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (16th ed.). Wiley.
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  • Needles, B. E., & Powers, M. (2018). Financial Accounting, 12th Edition. Cengage.
  • Whittington, R., & Wainwright, K. (2021). Financial & Managerial Accounting. McGraw-Hill Education.
  • Gibson, C. H. (2020). Financial Reporting & Analysis. Cengage.
  • Zimmerman, J. L. (2018). Accounting for Decision Making and Control. McGraw-Hill Education.
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  • Solomon, G., & Hansen, D. R. (2019). Accounting Principles. South-Western College Pub.
  • Leone, J. F., & McAnally, M. L. (2017). Advanced Financial Accounting. McGraw-Hill Education.

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