ACCT 2010 Lecture 3: Chapter 3 - The Income Statement

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ACCT 2010
Chapter 3 The Income Statement
Operating activities buying and selling of goods and services in order to collect cash
from them
Operating cycle: buy goods and services pay cash to suppliers/employees sell
goods and services collect cash from customers
Time period assumption divides the operating cycle into months, quarters, or years to
better evaluate how the company is doing
Cash basis accounting only records revenue and expenses when cash is received or paid
o Doesn’t really reflect how wealthy a company is
Accrual Basis of Accounting records revenues when earned and expenses related to the
revenues in the same time period; doesn’t matter when the cash receipts or payments
Revenue recognition principle revenues recognized when earned
Expense recognition principle records expenses in the same periods as the revenues
they are related to
Diagram from “Fundamentals of Financial Accounting”
Receiving cash before giving sale/service liability that is unearned revenue
Giving the sale/service before receiving cash asset that is accounts receivable
Pay cash before expense occurs asset that is a supplies inventory
Expense occurs before cash is paid liability that is accounts payable
Unadjusted trial balance
o Checks if the ending balances for each account have debits that equal credits
o Lists every account name in order of assets, liabilities, stockholders’ equity,
revenue, and expenses
o shows balance sheet accounts first and income statement accounts and shows
balanced at bottom (look at example 3.9 in book)
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