Financial and Managerial Accounting | Assignment

FINANCIAL AND
MANAGERIAL
ACCOUNTING
STUDENT ID:
[Pick the date]

Question 2
a) The key concern in the given situation relates to recognition of revenue by Tom. The
revenue recognition principle provides guidance to accountants and professionals as to
when the revenue from a particular transaction ought to be recorded. As per GAAP, the
revenue from a given transaction must be recognised only when the same has been earned.
This is in line with the accrual accounting norms (Deegan, 2015). An alternative
framework is cash accounting whereby revenue is recorded when cash is received.
However, GAAP considers accrual accounting superior and thereby does not recognise
revenue till the time underlying good or service has been provided. Any advance payments
by the customer for goods or service would be liability and recorded as unearned liability
(Dunn, 2014).
From the above discussion, it is evident that Tom is in the service business since he runs a
dance studio. The duration of the course offered by him is 12 weeks and the students pay in
cash in the first week. Tom recognises the revenue on the day when the cash is received.
This is clearly in violation with GAAP revenue recognition since Tom would not have earned
the complete amount of fees on the date of first class. He should recognise either the
complete revenue after the last class on the 12th week or he can recognise part fees after each
week. This is because in that case he would have earned the fees since the underlying service
would have been offered.
b) As per GAAP, it is imperative that personal expenses and personal assets must not be
treated as business expenses and business assets. This is because there is a difference
between expenses which are personal in nature and those incurred in business. Even
though the owner of the business may draw money to fund personal expense, but it would
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