Accounting

 CHAPTER 6 

Receivables: Selling a Product or a Service

LEARNING OBJECTIVES

1. Understand the three basic types of business activities: operating, investing, and financing.  Operating activities:  selling products or services,  buying inventory for resale, and  incurring and paying for necessary expenses.  Investing activities:  purchasing property, plant, and equipment for use in the business or  purchasing investments, such as stocks and bonds of other companies.  Financing activities:  raising money by means other than operations to finance a business. Two common financing activities are: - borrowing (debt financing) and - selling ownership or equity interests in the company (equity financing). Use the two revenue recognition criteria to decide when the revenue from a sale or service should be recorded in the accounting records.  Revenue is recognized when  the work is done, and  cash collectability is reasonably assured.  The entries to record revenue from the sale of merchandise or performance of a service involve  debits to Cash or Accounts Receivable and  credits to Sales Revenue or Service Revenue.  In general, revenues are recognized at the time of a sale.  However, if cash is collected before a service is provided or a product is delivered, revenue should not be recognized until the promised action has been completed.

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ACCT-5031

 Revenue for long-term contracts is recognized in proportion to the amount of the contract completed. 3. Properly account for the collection of cash and describe the business controls necessary to safeguard cash.  The amount of cash collected from customers can be reduced because of sales discounts and sales returns and allowances.  Sales discounts are reductions in the payments required of customers who pay their accounts quickly.  Sales returns and allowances are payment reductions granted to dissatisfied customers.  On an income statement, sales discounts and sales returns and...