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1、(本科）会计专业英语教案 Chapter 6教 学目标知识目标：知识目标：Understand the definition of revenue and expense.能力目标：能力目标：Outline the main types of revenue.Describe what kinds of expenses may occur in a company.素质目标：素质目标：Understand the recognition criteria of revenue and expense.教 学重点The recognition criteria of revenue and e
2、xpense教 学难点The recognition criteria of revenue and expense教 学手段结合理论与案例小组讨论教 学学时2 课时教学内容与教学过程设计注释Chapter 6Revenue and Expense理论知识理论知识Topic 1:Revenues1.DefinitionRevenues are inflows of assets of a company or settlement of its liabilities duringa period from delivering or producing goods,rendering ser
3、vices,or other activities thatare the companys ongoing major or central operations.According to the differences of their contents,they can be classified into salesrevenue,service revenue and revenue of transferring the rights of assets.However,receivables for other businesses cant be recognized as r
4、evenue.They are liabilities.According to the differences of their importance,they also can be classified into mainrevenues and other business revenues.In the Income Statement,we usually use the lastclassification.Revenue is shown at the first line in the multi-step Income Statement.2.The Earning Pro
5、cess of RevenueAt conceptual level,a company earns revenue as it engages in activities thatincrease the value(or utility,in economic terms)of an item or service.For example,anautomobile parts manufacturer increases the value of sheet metal when it undertakesactivities to cut shape and weld the sheet
6、 metal into automobile fenders.Transportingcompleted fenders to a regional wholesale warehouse also adds value because it makesthe fenders readily available for purchase and use by automobile repair shops.Theearning process is fully completed when the fenders are sold and delivered to acustomer in r
7、eturn for cash or a promise to pay cash;finally,assets actually increase.All of these activities and many more,are part of the earning process.The earningprocess for most companies involves incurring costs to increase the value of anin-process product or service.Sometimes the earning process is very
8、 long.Forexample,the design and development process for a new commercial airplane can take 5(本科）会计专业英语教案 Chapter 6to 10 years from initial design efforts to the delivery of the first airplane to a customer.Example 6-1:when is revenue recorded in the accounting records?Assume that on May 24,a real es
9、tate company signs a contract to represent aclient in selling the clients personal residence.The contract entitles the real estatecompany to a commission equal to 5%of the selling price,due 30 days after the date ofsale.On June 30,the real estate company sells the house at a price of$120,000,thereby
10、earning a$6,000 commission($120,0005%),to be received on July 10.When shouldthe company record this$6,000commission revenueIn May,June,or July?The company should record this revenue on June l0the day it rendered theservice of selling the clients house.As the company will not collect this commissionu
11、ntil July,it must also record an account receivable on June 10.In July,when thisreceivable is collected,the company must not record revenue a second time.Collectinganaccountreceivableincreasesoneasset,cash,anddecreasesotherassetsAccounts Receivable.Thus,collecting an account receivable does notincre
12、ase ownersequity and does not represent revenue.Our answer illustrates a generally accepted accounting principle called therealization principle.The realization principle states that a business should recordrevenue at the time services are rendered to customers or goods sold are delivered tocustomer
13、sIn short,revenue is recorded when it is earned,without regard as to whenthe cash is received.3.Revenue RecognitionThe Generally Accepted Accounting Principle(GAAP)which guides therecognition of revenues is realization principle.The realization principle provides thatrevenue should be recognized in
14、the financial statement when it is earned and realizedor realizable.Revenues are earned when the company has accomplished what it mustdo to be entitled to receive the associated benefits of the revenue.This means that therevenue earnings process is essentially complete.Revenue is to be recognized on
15、lywhen all of the following criteria have been satisfied:(1)The entity has transferred the significant risks and rewards of ownership of thegoods to the buyer;(2)The entity retains neither continuing managerial involvement to the degreeusually associated with ownership nor effective control over the
16、 goods sold;(3)The amount of revenue can be measured reliably;(4)It is probable that the economic benefits associated with the transaction willflow to the entity；(5)The costs incurred or to be incurred in respect of the transaction can bemeasured reliably.For the traditional retail business,goods ar
17、e delivered to the customers at the sametime cash is received,and revenue will be recognized at the time of sales.However inother case that cash could be collected before or after goods or services are delivered,the timing of cash receipts from customers does not dictate when businesses reportrevenu
18、es.Instead,revenue will usually be recognized when the title,risks,and rewards ofownership have transferred to the customers.Depending on the situations,revenue may(本科）会计专业英语教案 Chapter 6be recognized at different point of time.Example 6-2 cash received at different times(1)cash received at the same
19、period goods/services delivered:The newspaper stand sells Macao Daily News to a customer who pays$4 cashand takes away the newspaper immediately.Entries:Cash$4Revenue$4Since cash is received at the same time the newspaper is delivered and all the fourcriteria are met,revenue will be recognized right
20、 away.For most companies and for most goods and services,revenue is recognized at thetime of delivery of the goods or services to the customer.Revenue is considered bothearned and realized or realizable when the product or service is delivered.The twoconditions for revenue recognition are usually me
21、t at the time goods or services aredelivered.Thus,revenue from the sale of products is usually recognized at the date ofsale,meaning the date the product is delivered to the customer.Revenue from servicesrendered is likewise recognized when the services have been performed and acceptedby the client.
22、(2)cash received before goods/services delivered:On Jan 1,the Fortune Magazine has received a subscription form and$120 froman IFT student for subscribing 12 issues of Fortune Magazine($10/issue).The studentwill receive 1 issue of the magazine on the last day of each month for 12 consecutivemonths.E
23、ntries:Jan 1 Cash$120Unearned revenue$120Jan 31 Unearned revenue$10Revenue$10When the company received the$120 annual subscription fee for the magazine,criteria 1 has not been met and revenue could not be recognized at that point of time.The cash received represented obligations to provide future ma
24、gazine issues to thestudents which will be booked to the“Unearned Revenue”account temporarily.By definition,“Unearned Revenue”is the collection of cash from customers orclients before goods or services are delivered.Since the goods or services have notbeen delivered yet,the revenue cannot be conside
25、red as“earned”,these cash receiptsare considered future obligations to the customers and will be booked to“UnearnedRevenue”as a liability account.Only when the goods or services are partially or fullydelivered,then the related amount will be unwound from the“Unearned Revenue”account and finally be r
26、ecognized as“Revenue”earned.In the above example,by the end of each month when the company deliveries themagazine to the student,it earns and records the revenue and reduces the liabilityaccount or“Unearned Revenue”account balance.(3)cash received after goods/services delivered):An old customer fill
27、ed in the cleaning form and dropped off his jacket for cleaning(本科）会计专业英语教案 Chapter 6at Davids Dry Cleaning on June 30,listed price for cleaning such jacket is$30.Davidcleans the jacket on July 1,but customers do not claim and pay for the jacket untilAugust 1.Entries:June 30(Customer requests servic
28、e):No Journal EntryJuly 1Accounts Receivable$30Revenue$30August 1 Cash$30Accounts Receivable$30Under the revenue recognition principle,Davids earns revenue on July 1,ratherthan August 1 when cash is received,since it performed the service and met all the fourcriteria for revenue recognition.On July
29、1,Davids would report a receivable on itsbalance sheet and revenue in its income statement for the service performed.Example 6-3 Recognition by percentage-of-completion:Construction Inc.is engaged in constructing a massive bridge in Wonderland.Thecontract is worth$200 million and the company is expe
30、cted to complete it in 3 years.In Year 1 the company has incurred an amount of$50 million on the contract and theengineers estimate that in the next 2 years the company is expected to expend$110million more.Based on the physical progress of the project the engineers also estimatethat 40%of the work
31、has been carried out.Solution:Under the survey method the engineers have provided their judgment of thepercentage of work completed and it is 40%.Based on costs incurred to date and total costs the percentage of completioncomes out to be:Percentage of work completed=$50 million ($50 million+$110 mil
32、lion)=31.25%.Total costs include costs incurred to date and costs expected to be incurred overthe remaining period.Based on the percentage of completion calculated using cost date we determinethan revenue of$62.5 million has been earned(31.25%multiplied by$200 milliontotal contract value).On the oth
33、er hand based on the engineers survey the revenuerecognized should be$80 million(40%multiplied by$200 million).In essence,the percentage of completion method allows you to recognize asincome that percentage of total income that matches the percentage of completion of aproject.The percentage of compl
34、etion may be measured in any of the following ways:Cost-to-cost method:This is a comparison of the contract cost incurred to dateto the total expected contract cost.The cost of items already purchased for a contractbut which have not yet been installed should not be included in the determination of
35、thepercentage of completion of a project,unless they were specifically produced for thecontract.Also,allocate the cost of equipment over the contract period,rather thanup-front,unless title to the equipment is being transferred to the customer.Efforts-expended method:This is the proportion of effort
36、 expended to date in(本科）会计专业英语教案 Chapter 6comparison to the total effort expected to be expended for the contract.For example,the percentage of completion might be based on direct labor hours,or machine hours,or material quantities.Units-of-delivery method:This is the percentage of units delivered t
37、o thebuyer to the total number of units to be delivered under the terms of a contract.Itshould only be used when the contractor produces a number of units to thespecifications of a buyer.Use the same measurement method for similar types of contracts.Doing soimproves the consistency of the percentage
38、 of completion results over time.Topic 2:Expense1.DefinitionExpenses are the costs of the goods and services used up in the process of earningrevenue.It represents an outflow of assets as a result of the efforts made to generaterevenue.Examples include the cost of employees salaries,advertising,rent
39、,utilitiesand the gradual depreciation of such assets as buildings,automobiles and officeequipment.All these costs are necessary to attract and service customers and therebyearn revenue.Expenses are often called the“costs of doing business,”that is,the costof the various activities necessary to carr
40、y on a business.In measuring net income for a period,revenue should be offset by all of theexpenses incurred in producing that revenue on a basis of“cause and effect”,which iscalled the matching principle.According to the matching principle,only the expenditures which have directrelationship to the
41、revenue in the given accounting period can be defined as expenses.At last,it is important to distinct the revenue expenses and the capital expenses.2.Categories of Expenses(1)Product costsProduct costs are costs directly related to the products.They are composed ofdirect material costs,direct labor
42、costs and manufacturing overhead.Direct materialcosts are the costs of raw materials to produce commodities.Direct labor costs aremainly the wages paid to manufacturing workers.(2)period expensesThe other category of expense is the period expense.Expenses in this category arenot directly associated
43、with products,but they are indispensable for generating thecurrent revenue.Such expenses are composed of administrative expense,advertisingexpense,sales expense,interest expense and so on.These expenses cannot be linked tosome specific product,but their occurrence is indispensable for gaining revenu
44、es.Sothey are called period expenses.3.Expense RecognitionExpense recognition is the act of converting an asset into an expense.This is donewhen the utility of an asset has been consumed.Expense recognition can arise on adelayed basis,when expenditures are made for assets that are not immediately(本科
45、）会计专业英语教案 Chapter 6consumed.Timing is an important factor in matching(offsetting)revenue with the relatedexpenses.For example,in preparing monthly income statements,it is important tooffset this months expenses against this months revenue.We should not offset thismonths expenses against last months
46、revenue,because there is no cause and effectrelationship between the two.4.Specific Expense Items(1)Cost of goods soldCost of goods sold is the accumulated total of all costs used to create a product orservice,which has been sold.These costs fall into the general sub-categories of directlabor,materi
47、als,and overhead.In a service business,the cost of goods sold isconsidered to be the labor,payroll taxes,and benefits of those people who generatebillable hours(though the term may be changed to cost of services).In a retail orwholesale business,the cost of goods sold is likely to be merchandise tha
48、t was boughtfrom a manufacturer.The cost of goods sold can also be impacted by the type of costing methodologyused to derive the cost of ending inventory.Consider the impact of the following twoinventory costing methods:First in,first out method.Under this method,known as FIFO,the first unitadded to
49、 inventory is assumed to be the first one used.Thus,in an inflationaryenvironment where prices are increasing,this tends to result in lower-cost goods beingcharged to the cost of goods sold.Last in,first out method.Under this method,known as LIFO,the last unitadded to inventory is assumed to be the
50、first one used.Thus,in an inflationaryenvironment where prices are increasing,this tends to result in higher-cost goods beingcharged to the cost of goods sold.Example 6-4 cost of goods soldA company has$10,000 of inventory on hand at the beginning of the month,expends$25,000 on various inventory ite