Question

The following is an excerpt from a conversation between Joel Loomis and Krista Truitt just before they boarded a flight to Paris on Delta Air Lines. They are going to Paris to attend their company's annual sales conference. Joel: Krista, aren't you taking an introductory accounting course at college? Krista: Yes, I decided it's about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department. Joel: I guess I never really thought about it. Krista: You should think about it! Last year, I placed a $750,000 order on December 28. But when I got my bonus, the $750,000 sale wasn't included. They said it hadn't been shipped until January 3, so it would have to count in next year's bonus. Joel: A real bummer! Krista: Right! I was counting on that bonus including the $750,000 sale. Joel: Did you complain? Krista: Yes, but it didn't do any good. Ashley, the head accountant, said something about matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figure I'd take the accounting course and find out whether she's just jerking me around. Joel: I never really thought about it. When do you think Delta Air Lines will record its revenues from this flight?

Answer 1

1. Delta airline should recognise the revenue from ticket sales when the good are shipped.

3rd January

Revenue is not recognised on the date of sale because there might be chances that the buyer can cancel the order so until the goods are shipped or delivered to the buyer it will not be recognised as revenue, there are certain terms on which the revenue be recognised, it can be recognised as per FOB shipping point or FOB destination point which is pre decided by the seller and buyer.

2. In order to reset the temporary accounts, one must do a closing entry that will negate whatever balance may be present. Examples of these accounts include revenues, expenses, gains, and losses. Thus, going back to the concept of resetting the financial statements, consider the impact of a closing entry. When an expense account on the income statement is closed out, per se, its balance is brought back to a zero. As a direct consequence of this, the firm is now ready to begin another accounting cycle without any values that could skew the final figures.

3. The purpose of the post-closing trial balance is just that. It ensures that at the end of an accounting period, the sum of the total debits is equal to the sum of the total credits.

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