ST - Revenue & Expenses

[Acid]

Hi,

Can you please explain me the following on GTG Studytext page A3.10 :


Revenues and expenses that result directly and jointly from the same transaction or events have to be recognised simultaneously or in a combined manner.

I dont understand the example which is trying to explain the above point.How does the example link to the point mentioned above ?

Thanks

Acid

[Acid]

Hi,

Need your help ,

In GTG Studytext page A3.17 , TEST YOUR UNDERSTANDING 5 . The amount of $2,500 has been rcvd. as dividends . So dont we pay the dividends to shareholders? Why is dividend recorded as revenue in the income statements?

Page A3.18 - Test your understanding 6 , Why cant we recognise the sale of $24,500 and keep a seperate warranty provision?

Thanks

Acid

[Snehal P]

Hi Acid,

The answers to your questions -

1) Example on page A3.10:
The point mentions that if there are two or more stages to one transaction, then both have to be recognised either simultaneously or in a combined manner.

The journal entries which will be passed to account for the example, will help you link the example to the point. (We will assume that the cost of stationery purchased is $800).

The journal entries made if the two stages of the transaction are recognised simultaneously are

1) Dr Stationery $800
Cr Cash $800
Being stationery purchased for cash

2) Dr Other expenses $30
Cr Cash $30
Being transport expenses incurred while purchasing stationery

The journal entry made if the two stages of the transaction are recognised in a combined manner is

Dr Stationery $800
Dr Cash $30
Cr Cash $830
Being stationery purchased and transport expenses incurred for purchasing stationery[/COLOR]


2) In GTG Studytext page A3.17 , TEST YOUR UNDERSTANDING 5 .

The dividend is recorded as revenue in the books of Perfect Industries as it has received the dividend.

The dividend is recorded as an expense in the books of Concept Inc as it has paid the dividend.

3) Page A3.18 - Test your understanding 6 ,

In this example there is no talk of repairs or replacement of the machine. Square Co has to dismantle and take back the entire machine. So even if we recognise the sale of $24,500 don’t you think Square Co will have to make a provision of the entire amount? (I suggest that you return to this question after you finish studying chapter C7 which is on provisions).

Hope this helps,
Now is it :) or is it still :( ?

Snehal P

[Acid]

Thanks for your really helpful reply.

Just 1 more thing .


The dividend is recorded as an expense in the books of Concept Inc as it has paid the dividend

Is the dividend considered as an expense or a distrubution out of the profit?

Thanks

Acid

[Snehal P]

Hi Acid,

Paying dividends is not an expense.
It is the division of profits among shareholders

(In the earlier answer I wanted to show the difference between dividend received and dividend paid when I said that “The dividend is recorded as an expense in the books of Concept Inc as it has paid the dividend”).

Dividend paid is debited in the Income statement.
Dividend received is credited in the Income statement.

Snehal