STARTING UP A BUSINESS PART 2

LECTURE NOTES:

Determining Income through Operation

Revenue Recognition Concept

The Realization Rule recognizes revenue when it is earned. For a service business, it is earned
when the service is rendered while in a merchandising or manufacturing concern,it is earned
when the merchandise or product is sold and delivered to the customer. Thus, service or goods
delivered in 2018 but collected in 2019 should be recorded as revenue in 2018. Note that
collection, whether cash or in property, is not a requirement in recognizing revenue.

Expense Recognition Concept

Expenses are recognized in association with the earnings of specific income items within a
specified period of time. This is called the Matching Principle since there can be ni revenue
earned without some sacrifice (in the form of expense) made by the business.

There are three ways of recognizing expenses in generating revenue:

a) Expense is recognized when revenue is recognized. Example: a commission is paid to a
salesman every time he makes a sale
b) Resources or assets that will benefit the business over a number of years should be
allocated (spread out) as expense over the years that will benefit from its use.
Example:ABC Padala purchased a delivery truck for P500,000.It has a useful life of 10
years. It means that Depreciation Expense of P50,000 should be recognized every year
for 10 years for using the delivery truck
c) Periodic expenses are necessary to operate the business such as salaries, rent and
utilities

Accrual vs Cash Concept

The Accrual Concept requires that revenues and expenses be recognized based on the time
period they relate or based on the occurrence of revenue and expense transactions rather than
on whether cash is received or paid. On the other hand, the Cash Concept recognizes revenue
only when cash is collected and expenses when cash is paid.

Operating a Business for Profit

Assets = Liabilities + Owner’s Equity

Increases due to: Decreases due to:

Investments Withdrawals

Revenue Expenses
A revenue represents an inflow of cash or other assets coming from clients and customers for
service rendered or for merchandise sold to them. The account title used to describe revenue:
Service Income, Professional Income, Sales, Tuition Income, Medical Fees, Rental Income etc.

Accounts receivable represents the right of the business to collect from patients, clients or
customers and is considered an asset because it is convertible to cash.

An expense is the consumption of an asset or using up a service to generate revenue. The

account title used to describe expenses: telephone expenses, light expenses, water
expenses,salaries expense

Net income or profit results when the total revenues earned is greater than the total amount of
expenses incurred by the business

Revenues-Cost and Expenses=Net Income/ Net Loss

Sample Problem 1:

Happy and Tour Travel Agency owned by Gomez.

March 21 A tourist hired the services of the agency for a tour in Baguio. Cash of P15,000 was
received from the tourist.
March 22 Cash was paid for the following: gas and oil-P500 and repair of car-P1,000
March 24 Mr. Gray hired the services of the agency for his visitors and promised to pay P16,000
on March 31
March 25 Paid telephone bill for P500
March 27 The Faculty club of Angelicum Academy hired the services of the agency for a tour in
Manila. A bill was issued to them for P20,000, out of which 50% was already collected
March 30 Mr. Gray paid one half of his account in cash
March 31 Paid for rental of office space: P10,000 and salaries of employees and workers
P9,000

The following table summarizes the transactions on the accounting equation:

ASSETS LIABILITIES OWNER’S EQUITY

Date Cash Accounts Cars Equipment Furniture Loans Payable Gomez Capital
Receivable

MARCH 45000 750,00 55,000 45,000 100000 795,000

20 0
(beginnin
g
balance)

21 15,000 15,000
 22 -1,500 -1,500

24 16,000 16,000

25 -500 -500

27 10,000 10,000 20,000

30 8,000 -8,000

31 -19,000 -19,000

Balances 57,000 18,000 750,00 55,000 45,000 100000 825,000

0

925,000=925,000