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Mar. 24, 2016

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A Simple Exercise in Accrual Accounting to

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Illustrate the Timing of Revenue and Expense Recognition

You work for an organization that offers various events to its members. You spent the months of October
and November organizing a conference to be held the following February and marketed it to your members.
The conference will run for five days, with the first and last day being half days. Assess the impact on your
organization’s financial statements of several decisions you have made regarding the conference:

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1. The marketing efforts were successful: 100 people, the maximum capacity, registered in November for
the conference. They paid their $850 registration fee at the time they registered. The registration fee
included the cost of the conference sessions, all meals except for one dinner not held at the conference
hotel, and transportation to the off-site dinner.

When can revenue for the conference be recorded on your organization’s income statement?
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How much revenue do you record at that point?

What is the effect on the financial statements (balance sheet and income statement) in November? In
February?

2. You signed a contract with four people to work at the conference as representatives of your association.
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The cost of their services was $1,000 per person, to be paid upon completion of the conference.

When should the expense for their services be recorded on your organization’s income statement?

What is the effect on the financial statements (balance sheet and income statement) in November? In
February?

3. You reserved 104 hotels rooms for four nights (100 rooms for the registered participants and 4 rooms
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for the people you hired to work at the conference). The total cost of the rooms was $40,000. You
paid a 20% deposit in cash (i.e., certified check) upon reserving the rooms in November. The balance
is due at the end of the conference, at which time you will provide that payment with a second certified
check.

When should the expense for the hotel rooms be recorded on your organization’s income statement?

What is the effect on the financial statements (balance sheet and income statement) in November? In
February?
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This exercise was prepared by Luann J. Lynch, Almand R. Coleman Professor of Business Administration. Copyright  2016 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording,
or otherwise—without the permission of the Darden School Foundation.

This document is authorized for educator review use only by Ranjana Sharma, Doon Business School until Sep 2024. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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4. You signed a contract with the hotel to provide food and beverage services for all breakfasts, lunches,
and breaks and for dinners on three of the four nights. The total cost of these services was $13,000. A
deposit of 20% is required in December (two months prior to the conference), with the remainder due
in January.

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When should the expense for the food and beverage services be recorded on your organization’s
income statement?

What is the effect on the financial statements (balance sheet and income statement) in November? In
December? In January? In February?

5. Using your excellent negotiation skills, you convinced the hotel to allow the use of two conference
rooms at no charge, as a result of your booking rooms and signing a food and beverage contract with

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the hotel.

What is the effect on the financial statements (balance sheet and income statement) in November? In
February?

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
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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.

When should the expense for the transportation services be recorded on your organization’s income
statement?
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What is the effect on the financial statements (balance sheet and income statement) in November? In
February?

7. You signed contracts with 10 speakers for the conference. The total cost amounted to $20,000 and is
payable within 30 days of the end of the conference.

When should the expense for the speakers’ services be recorded on your organization’s income
statement?
No

What is the effect on the financial statements (balance sheet and income statement) in November? In
February?
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This document is authorized for educator review use only by Ranjana Sharma, Doon Business School until Sep 2024. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860