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Chapter 5

ADMS 2510 Chapter Notes - Chapter 5: Deferral, Accounts Payable, Net Income

Administrative Studies
Course Code
ADMS 2510
Alison Beavis

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Module 5
Merchandising Operations
Income determination
Under accrual accounting, expenses are matched with related revenue to determine
net income for a specific time period
Revenue $xxx
Less: Expenses ($xxx)
Net income $xxx
If in January:
A photographer has sales of $7500
Photographic supplies worth $700 are purchased on account
$500 is paid for the photographic supplies purchased
$400 of supplies is used up
What was the net income for Jan if there were no other expenses?
400 of supplies were used up therefore owner’s equity would go down by
Thus, net income is $7100
Net income = revenue expenses
Net income = 7500 supplies expense = 7500 400 = 7100
Recognize expenses
Dr supplies (Balance Sheet)
Cr Cash or Accounts Payable (Balance Sheet)
But, you don’t recognize expenses at time of purchase
Dr Supplies Expense (Income statement)
Cr Supplies (Balance Sheet)
Recognizes expenses at time assets expire or used up
Expenses: A decrease in Net Assets used up assets
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Unmatched revenues and expenses are misleading
Cash Vs. Accrual Basis
In cash basis, revenue is recognized when money is exchanged or received and
expenses are recognized when money is paid
Cash basis distorts a firms financial position and over or understates performance
Service Operations
Provide service rather than selling products
Have relatively small supply coats
Match expenses to revenue at end of period
Merchandising Operations
Buying and selling finished goods
Cost of goods sold the cost of items shipped to customers is usually a large
Inventory balance sheet item goods held for sale
Cost of goods sold is an important expense for merchandising operations
COGS is a separate line item on the income statement
The change in inventory is computed at the time of each state (perpetual method)
Income Statement
Revenue $xxx
Cost of goods sold xxx
Gross Profit xxx
Operating Expenses
Selling expense xxx
Administrative Expenses xxx
Net Income xxx
Balance Sheet
Current Assets
Cash $xxx
A/R xxx
Inventory, at cost xxx
Prepaid expenses xxx
Total Current Assets xxxx
Capital Assets
Land $xxx
Buildings and equipment xxx
Less: Accumulated depreciation xxx xxxx
Total Assets $xxxx
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