Accounting for Deferrals
3.2.3 Analysis of supplies purchase transaction
3) Buying supplies also results in a deferral. When SuperDels got supplies, it recorded them in the Supplies account.
Supplies is an asset account used to keep track of supplies (i.e., pencils, paper). The Supplies account is increased when new supplies are acquired and decreased when supplies are used / expensed (usually in a single adjusting entry at period end).
This is an asset exchange transaction:
Illustration 3-13: Effect of purchase of supplies
|
Assets |
... |
Assets |
|
Cash |
... |
Supplies |
Beginning Balances |
$3,900 |
|
$ 0 |
3) Purchase of Supplies |
(500) |
|
+500 |
Ending Balances |
3,400 |
|
500 |
3.2.4 Analysis of revenue recognition on account transaction
4) Recognizing $5,000 of revenue on account is an asset source transaction and is already known to us:
Illustration 3-14: Effect of recognizing revenue on account
|
Assets |
... |
Equity |
|
Accounts Receivable |
... |
Revenue |
Beginning Balances |
$ 0 |
|
$ 0 |
4) Revenue Recognition |
+5,000 |
|
+5,000 |
Ending Balances |
5,000 |
|
5,000 |
3.2.5 Analysis of cash collection transaction
5) The effect of collecting cash on the accounts receivable is presented below. Accounts Receivable decrease and Cash increases (asset exchange transaction):
Illustration 3-14: Effect of cash collection
|
Assets |
... |
Assets |
|
Cash |
... |
Accounts Receivable |
Beginning Balances |
$3,400 |
|
$5,000 |
5) Cash Collection |
+4,000 |
|
(4,000) |
Ending Balances |
7,400 |
|
1,000 |
3.2.6 Analysis of cash expense recognition transaction
6) Paying $1,400 cash for operating expenses acts to decrease Cash account and increase Operating Expenses account. This is an asset use transaction:
Illustration 3-16: Effect of Recognizing Expense
|
Assets |
... |
Equity |
|
Cash |
... |
Operating Expense |
Beginning Balances |
$7,400 |
|
$ 0 |
6) Expense Recognition |
(1,400) |
|
(1,400) |
Ending Balances |
6,000 |
|
(1,400) |
3.2.7 Analysis of land sale transaction
7) Selling land results in a loss of $300. As the Land account had a balance of $1,000 and was sold for $700, the total assets decreased by $300. This decrease is called a loss.
Losses are similar to expenses in the way that both decrease assets or increase liabilities; however, losses differ from expenses in that they are caused by incidental transactions, rather than from ordinary operating activities.
Gains are similar to revenues; however, gains result from incidental transactions rather than from operating activities.
The sale increases Cash by $700, decreases Land by $1,000, and decreases equity (Loss) by the difference between the original cost and cash received, or $300 ($1,000 - $700):
Illustration 3-17: Effect of Recognizing Revenue on Account
|
Assets |
Assets |
... |
Equity |
|
Cash |
Land |
... |
Loss |
Beginning Balances |
$6,000 |
$1,000 |
|
$ 0 |
7) Land Sale |
+700 |
(1,000) |
|
(300) |
Ending Balances |
6,700 |
0 |
|
(300) |
Note that the land cost was divided into two parts: (a) cash received ($700) and (b) loss ($300), which in total equal the initial cost ($700 + $300 = $1,000).
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