Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

When a company earns revenue on account, which of the following best describes the effect on the financial statements?

Only cash increases; no other accounts are affected.

Revenue is recognized and accounts receivable increases.

Revenue is not recognized until cash is received.

Expenses are recognized and accounts payable increases.

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Verified step by step guidance

Understand the concept of 'revenue on account': Revenue earned on account means the company has provided goods or services but has not yet received cash payment. Instead, the company expects to receive payment in the future, which is recorded as accounts receivable.

Identify the impact on the financial statements: When revenue is earned on account, it affects two accounts: (1) Revenue, which increases to reflect the income earned, and (2) Accounts Receivable, which increases to show the amount owed by customers.

Clarify why cash is not affected: Since the company has not yet received payment, cash does not increase. The transaction is recorded as accounts receivable, representing the promise of future payment.

Explain why revenue is recognized immediately: According to the accrual basis of accounting, revenue is recognized when it is earned, not when cash is received. This ensures the financial statements accurately reflect the company's performance during the period.

Address incorrect options: (1) Revenue is recognized and accounts receivable increases is correct. (2) Revenue is not recognized until cash is received is incorrect because it contradicts accrual accounting principles. (3) Expenses are recognized and accounts payable increases is unrelated to revenue earned on account.