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HBX Financial Accounting
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Assets
✓ Cash, inventory, equipment, prepaid assets, invoices
Liabilities
✓ Accounts payables, salaries, sales taxes payable, unredeemed gift
certificates, long term debt
Owner's Equity
✓ Contributed capital, retained earnings
Module 4 Explicit transactions
✓ triggered by some sort of activity, event, or transfer of resources (usually
cash) from one party to another; often accompanied by invoices,
receipts, or other paper documentation that initiate the recording of
the transaction.
identifying explicit transactions:
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✓ (1) A transfer of resources, usually cash
✓ (2) Invoices, receipts or other paper documentation
✓ (3) A specific event or activity that clearly triggers a journal entry
✓ (4) Clarity regarding when to record and how much to record
Implicit transactions
✓ arise due to the nature of the accrual accounting method, which
follows the revenue recognition principle and the matching principle.
Under this method, revenue should be recognized in the period in
which it is earned and realizable, not necessarily when the cash is
received. Expenses should be recognized in the period in which the
related revenue is recognized rather than when the related cash is
paid. In order to do this we must make adjusting journal entries, which
are implicit transactions. Implicit transactions do not involve a specific
triggering activity, event, or transfer of resources from one party to
another. Often, implicit transactions represent changes in value related
to the passage of time.
There are four basic types of adjusting journal entries:
(1) Recognizing expenses related to a prepaid asset
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✓ Suppose a company pays cash for one year's worth of rent. They will
now have an asset account, prepaid rent, on their books. As each
month passes, that asset is worth less and less, and it will need to be
reduced or expensed accordingly.
2) Recognizing revenues related to deferred revenue (also called unearned
revenue)
✓ Suppose a company receives cash from a customer for a year-long,
monthly magazine subscription. The company will now have an
obligation to provide magazines to their customer. They will record a
liability, deferred revenue, on their books. As each month passes, and
the magazines are provided, the liability account needs to be reduced
and revenue needs to be recognized as earned.
(3) Accruing of unrecorded expenses
✓ Entries related to unrecorded expenses usually occur at the end of the
accounting period, during the closing process. The purpose of this type
of entry is to account for any expenses that weren't recorded
throughout the year because there was insufficient information. Some
examples would be accruing for property tax or interest expense, or
accounting for inventory shrinkage.
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(4) Accruing of unrecorded revenues
✓ Similar to the accrual for unrecorded expenses, unrecorded revenues
are usually accounted for at the end of the accounting period. This
type of entry reflects revenues that have been earned but not yet
billed. For example, suppose a firm provides consulting services for a
client in December. At year end, the firm has yet to send the client a
bill for those services. Since the service has been provided, and the
client will be billed eventually, revenue must be recorded.
Key indicators to look for in identifying implicit transactions:
✓ (1) No transfer of resources
✓ (2) No invoices or other paper documentation
✓ (3) No specific event or activity that clearly triggers a journal entry, just
the passing of time
✓ (4) Judgement regarding when to record and how much to record
accrual method of accounting
✓ means that companies record both explicit and implicit transactions in
the period in which they are incurred, which is not necessarily the same
period in which cash was paid or received
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