ACT 225 Group 2

Integrated Accounting Fundamentals

Asynchronous Learning Activities

Part 1: Theoretical
1. Explain why accounting is a language of business. (2 pts)
Accounting is the language of business because it is the mode of communication used in
business. It is used to communicate the financial and economic position of a firm or entity to
investors, creditors, etc. It passes on financial information through statements and reports to
external users. Accounting, as a language of business, provides information that can be useful in
economic decisions.
2. Explain the 5-step model of revenue recognition. (5pts)
Step 1: Identify the Contract with a Customer
This step will be straightforward the majority of the time. The contract can be written, verbal, or
implied and is based on your company’s ordinary practices. The contract should outline payment
terms and any other rights of your business and the customer related to the goods or services that
will be transferred.
Step 2: Identify the Performance Obligations in the Contract
This step identifies what’s being delivered or provided to the customer. This is one of the more
significant changes because a contract can have more than one performance obligation, and each
obligation will need to be specified. Once you’ve established the contract, identify each promise
you make to the customer – the performance obligation. A performance obligation is a distinct
good or service, or a series of distinct goods or services, that are substantially the same and have
the same pattern of transfer to the customer.
Step 3: Determine the Transaction Price
This step outlines what must be considered when establishing the transaction price, which is the
amount the business expects to receive for transferring the goods and services to the customer.
The contract may include fixed consideration, variable consideration, or both types.
Step 4: Allocate the Transaction Price to the Performance Obligations
This step outlines guidelines for allocating the transaction price across the contract’s separate
performance obligations, and is what the customer agrees to pay for the goods and services.
Assign a price to each performance obligation in the contract. Base the prices on relative
standalone selling prices like the sale of similar goods or services, a contractually stated price, or
a list price. If there are multiple performance obligations, the transaction price must be allocated
to each performance obligation on a relative standalone basis. The best way to do this is to
compile each performance obligation’s standalone price if it were sold separately by the entity.
Step 5: Recognize Revenue When or As Performance Obligations Are Satisfied
Revenue can be recognized as the business meets each performance obligation. Revenue will be
recognized as the performance obligations are completed and control of the good or service is
transferred to the customer. The key point to remember about this step is that revenue should be
recognized either over time, or at a point in time, and that these two approaches are mutually
exclusive from each other.
3. Explain why income should be recorded when earned regardless if not yet collected nor
realized. (3pts)
It should be recorded when earned regardless if not yet collected or realized, because it will
affect the financial statements if we disregard it. It will mess up all the transactions, so we need
to record it properly and correctly.
Using the Realization of Revenue principle, revenue is recognized when it is earned regardless of
the collection. For a service business, revenue is earned when service is rendered, while for a
merchandising or manufacturing business, it is earned when the merchandise or product is sold
and delivered to the customer.
4. Explain the concept of unearned income. Give at least 2 examples. (5 pts)
Unearned income is income that is received before it is earned by goods being delivered or
services performed, or income that you do not have to work to earn because it is not acquired
through work or business activities, such as from inheritance money, property, and interests or
dividends from investment.
Examples:
-Oct. 5: Gwyn bought an airline ticket for a flight going to Milan, Italy on 14th of December
-Ralph paid 3 months advance for his house rent.
5. Explain the concept of accrued expenses. Give at least 2 examples. (5 pts)
Accrued expense is an expense that is recognized on the books before it has been paid. The
expense is recorded in the accounting period in which it is incurred.
Examples:
-Mark counts his unused vacation and sick days for the end of the year 2021 salary
-Interest is payable on the 20th of each month, and the accounting period is the end of each
calendar month. The month of April will require an accrual of 10 days of interest, from the 21st
to the 30th.
6. How to compute a depreciation expense based on straight line method? (2pts)
To compute a depreciation expense based on straight line method is (cost – salvage value) /
useful life.
7. What is book value of an asset? How is book value of fixed asset computed? (3pts)
The book value of an asset is calculated by netting the asset against the asset's total accumulated
depreciation. It is the cost of maintaining an asset on a company's balance sheet. The book value
of fixed assed is computed by the formula:
Asset Book Value=Original Cost-(Annual Depreciation x Age)

Reference
https://www.netsuite.com/portal/resource/articles/accounting/straight-line-
depreciation.shtml#:~:text=The%20formula%20to%20calculate
%20annual,100%2C000%20%E2%80%93%20%2415%2C000)%20%2F%205.
https://www.investopedia.com/terms/b/bookvalue.asp#:~:text=Investopedia%20%2F%20Julie
%20Bang-,What%20Is%20Book%20Value%3F,asset%20against%20its%20accumulated
%20depreciation.
https://www.thebalancemoney.com/what-is-the-book-value-of-an-asset-398146#:~:text=The
%20calculation%20of%20book%20value,of%20the%20asset%20in%20years.