Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Defining accrued revenue
- How accrued revenue is recorded on adjusting entries
- Revenue recognition principles
- Reporting on the income statement



We've reviewed examples of prepaid expenses, accrued expenses and unearned revenue in the last three lessons. Now let's take a look at the final type of accrued adjusting entry, accrued revenue.

Think of the term of accrued revenue as revenue that has not yet been collected. Essentially the company has earned the money but the cash has not been received in the current month. This type of adjusting entry normally comes into play when a company is providing goods or services but not obtaining payment in advance.
 
The word accrued is used to describe this type of adjusting entry, as the economic event of providing the service is recognized first, before the cash event.



Let's say we are a consulting company and we have provided $2,000 worth of services that have not yet been recorded. We have incurred all of the expenses related to providing the service, but the funds have not been received yet.
 
In this example, we would make an adjusting entry to recognize the income that has been earned. The company provides a management consulting service for the full month of May and they bill their clients for $2,000 on the 31st of May. They have earned the money during that month, but they will not receive the payment until the following month. The adjusting entries will need to reflect the revenue that has been earned during the month of May.

In the adjusting entry example above, the debit entry in accounts receivable represents the asset that is owed by the client for the consulting services and earned by the company. The credit entry is for the revenue that the company earned as a result of providing the consulting service.



When we look at the income statement, it reflects the company's expenses and revenues for a specific period of time. Under the accrual basis of accounting, revenues should be recorded when they are earned in order to align the expenses that were consumed.

If revenue is earned during a given month, it should be recorded during that month even if payment has not yet been received. Accrued revenue adjusting entries are needed to account for the funds that have been earned. This concept often applies when a company invoices their clients on credit terms of net 30, 45 or 60 days as the revenue has been earned but the client has a certain amount of time to pay in full.

Above is an example of an income statement for Sam's Appliance Shop. They are currently showing Sales revenue of $ 1,870,841. If the company sold or repaired appliances, and the funds had not yet been received, they would need adjusting entries to calculate the final total of sales revenue that should be recorded.



Adjusting entries are required for accrued revenue as the financial reporting must comply with the GAAP revenue recognition principles. This means that the company must report the revenue that has been earned but not yet collected. Performing the adjusting entries not only allows the company to remain in compliance, but ensures consistent measurement of their financial performance.
 
Another aspect of revenue recognition is the requirement that the revenue is realized or is expected to be realizable. This simply means that cash is received or is due to be received in the future. In the case of accrued revenue, the revenue needs to be recognized with the adjusting entry before the cash is in hand.
 
In the next lesson, you will see another example of accrued revenue when we review the concepts of amortization and depreciation.