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Financial Reporting Mechanics
Financial Reporting Mechanics
Borrower
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Asset: Liability:
Loan Receivable Loan Payable
REVENUE EXPENSE
• Revenue, sales • Cost of goods sold
• Gains • Selling, general, and
• Investment income administrative expenses
(e.g., interest and (SG&A; e.g., rent, utilities,
dividends) salaries, advertising)
• Depreciation and
amortization
• Interest expense
• Tax expense
• Losses
Beginning
Contributed Retained Net
Assets = Liabilities + Capital + Earnings + Income - Dividends
Beginning
Contributed Retained
Assets = Liabilities + Capital + Earnings + REV - Expenses - Dividends
Beginning
Contributed Retained Net
Assets = Liabilities + Capital + Earnings + Income - Dividends
Beginning
Contributed Retained
Assets = Liabilities + Capital + Earnings + REV - Expenses - Dividends
Beginning
Contributed Retained Net
Assets = Liabilities + Capital + Earnings + Income – Dividends
Beginning
Contributed Retained
Assets = Liabilities + Capital + Earnings + Revenue –Expenses – Dividends
Assets 2,000
Liabilities 500
Contributed equity 1,250
Retained earnings 250
Owners’ equity 1,500
Total liabilities and equity 2,000
Revenue 250
Expense 50
Net income 200
Assets 2,200
Liabilities 500
Contributed equity 1,250
Retained earnings 450
Owners’ equity 1,700
Total liabilities and equity 2,200
Contributed Retained
Cash Payable Capital Earnings
Beginning balance 2,000 500 1,250 250
Contributed Retained
Cash Payable Capital Earnings
Beginning balance 2,000 500 1,250 250
Total = $2,200
• In the ABC example, the company received cash for all revenues when
they were earned and paid cash for all expenses when they were
incurred.
• In practice, a company may
- Earn revenue before it receives cash or earn revenue after it
receives cash.
- Incur an expense before it pays cash or incur an expense after it
pays cash.
• Accrual accounting requires that revenues be recorded in the period
they are earned and that expenses be recorded in the period they are
incurred, irrespective of when the related cash movement occurs.
Settled transaction – no
PREPAID EXPENSE ACCRUED EXPENSES
accrual entry needed
Jour
• Journal Entries and Adjusting Entries
nal
Led
• General Ledger and T- Accounts
ger
Fina
ncial • Financial Statements
Stat
eme
nts