Question

6. You made dinner reservations at a local restaurant on one of the conference nights. You reserved busses to transport participants to the restaurant at a total cost of $500. The transportation company agreed to bill you upon completion of the conference, and you have 30 days to pay the bill after receiving it. No deposit or advance payment was required. Participants will be responsible for paying for their own meals and beverages while at the restaurant. a. When should the expense for the transportation services be recorded on your organization’s income statement? b. What is the effect on the financial statements (balance sheet and income statement) in November? In February?

Answer 1

According to accrual concept, the income and expenses are recorder as and when they are actually earned and incurred respectively but not when they are received and paid.

Expenses are recorder if they are incurred irrespective of the payment.

Incomes are recorded if they are earned irrespective of the receipt.

In this case,first the service is provided and later the payment is made for that service. But irrespective of the payment we should record the transportation expenses on the date of billing, but not on the date of payment.

Therefore transportation services are recorded on the date of billing only.

Effect on income statement is that the expenses will be increased and profit will be reduced due to recording of expenses.

Effect on balance sheet is that the amount of transportation expenses is shown as a liability till it is paid.