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

2. Transaction Analysis

Journal Entries: Business Formation Example

Financial Accounting

2. Transaction Analysis

Journal Entries: Business Formation Example

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Multiple Choice

Signing an 18-month lease on a two-bedroom townhouse with a monthly rent of $900 creates a:

future obligation (commitment) that is not recorded as a liability at signing

revenue recognition for the landlord at the time of signing

current liability for the total lease amount on the balance sheet

prepaid rent asset for the entire lease term

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Verified step by step guidance

Understand the nature of the lease agreement: Signing an 18-month lease creates a contractual obligation for the tenant to pay rent monthly. However, this obligation is not recorded as a liability at the time of signing because it represents a future commitment rather than a current liability.

Analyze the concept of liability: A liability is recorded on the balance sheet when there is a present obligation resulting from past events that will require an outflow of resources. At the time of signing, the tenant has not yet incurred the obligation to pay the rent for future months, so it is not recorded as a liability.

Consider revenue recognition for the landlord: Revenue is recognized when it is earned and realizable. For the landlord, revenue is recognized monthly as rent is earned, not at the time of signing the lease agreement.

Evaluate prepaid rent: Prepaid rent is recorded as an asset when payment is made in advance for future rental periods. At the time of signing, no payment has been made for the entire lease term, so a prepaid rent asset is not recorded.

Conclude the correct classification: The lease agreement creates a future obligation (commitment) for the tenant to pay rent monthly, but this obligation is not recorded as a liability at the time of signing. It is simply a contractual commitment.