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Lecture 4

COMMERCE 1AA3 Lecture Notes - Lecture 4: Financial Statement, Going Concern, Deferral

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Emad Mohammad

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Financial Accounting – Lecture 4
August 1, 2015, A tenant leases a property for one year. Annual rent $12000
December 31, 2015 the tenant has not paid any rent yet.
What is the rent expense for 2015?
Rent expense=12,000/12x5=$5000
To record the recognition of rent expense and rent payable:
Dr. Rent Expense 5,000
Cr. Rent Payable 5,000
Without the above adjusting entry, income is overstated and liabilities are
understated. In this case, accounting information is not FAITHFULLY
July 31 2016: Tenant pays $12000 and moves out.
Rent Expense for 2016?
Cash basis vs. Accrual Basis
Cash basis mismatches revenue and expenses
The Revenue Recognition Principle
Recognize revenues when
oThe earnings process is complete or nearly complete
oAn exchange transaction takes place
oCollection is reasonably assured
The Matching Principle
Resources consumed to earn revenues in an accounting period should be
recorded in that period, regardless
Sale of merchandise
Two Entries
Cash XX
Sales Revenue XX
Costs of Goods Sold XX
Inventory XX
Your asset becomes an expense when you use it to generate revenue
Depreciation Expense
A laptop purchased for $1500, and is expected to be used for three years.
Since the laptop will help generate revenues for three years, we must recognize an
annual depreciation expense of $500
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