Revenues increase Equity Expenses decrease Equity

Credit SideDebit Side

ReliabilityInfo strives to faithfully represent the economic situation-Completeness -Includes all info necessary for user to understand-Neutrality -Info cannot be manipulated; free from bias-Freedom from Error -Contains no errors/omissions -Does not require perfect accuracy

EarnedGoods/services are delivered & related obligs are completeSeller has performed duties under terms of sales agreement- title has passed to buyer w/o right of return or contingencies

RealizedSeller has received cash or will at some point in the future (AR)

Reliability, or faithful representation, is a necessity for individuals who neither have

the time nor the expertise to evaluate the factual content of the information.

Retained EarningsEquipmentCommon StockUnearned RevenueSalesRent ExpenseInventory

Assets = Liabilities + EquityD C D C D C

Net income = Revenue - ExpensesRetained Earnings = Net Income - DividendsNet sales = Credit sales - Sales returns & allowancesNet Book Value = Cost - Accumulated Depreciation

BS, REBSBSBSISISBS

SEASELREA

IS=income statement | RE=retained earnings | BS=balance sheet

R=revenueE=expenseA=assetL=liabilitySE=Stock- hld eq

ITEM

STUDY GUIDE

MY SIDE

HANDY FORMULAS

ITEMS, STATEMENTS, & ACCOUNTS

STATEMENT ACCOUNT

Allow. for Bad DebtBad Debt Exp

-4,500-4,500

BALANCE SHEET

ASSETS = LIABILITIES + EQUITY

INCOME STATEMENT

REVENUE - EXPENSES = NET INCOME

Acquire PP&EYear 1 depreciationYear 2 depreciationYear 3 depreciation

+10,000-3,000-3,000-3,000-3,000-3,000-3,000

BALANCE SHEET ASSETS

PP& E ACCUM. DEPR

INCOME STATEMENT

DEPR. EXPENSE

InventoryCOGS ExpenseCashSales RevenueTotals

-500

+500 +500

-500 -500

-500

=-500

=500=1,000

+1,000+1,000 +1,000

+1,000

BALANCE SHEET

ASSETS = LIABILITIES + EQUITY

INCOME

STMT

BALANCE

SHEET

INCOME STATEMENT

REVENUE - EXPENSES = NET INCOME

Receivable = AssetD C

Lesson 1 | Accounting Concepts

Lesson 2 | Accounting Building Blocks

Assets = Liabilities + EquityD C CD C D

Lesson 3 | Revenue & Receivables

2) Reporting entities

Financial stmtsFootnotesAuditors's reportMgmt's discussion & analysis (MD&A)

about

accounting equation

through

to 3) Primary users

Purpose of accounting: 1) Provide financial information

Basic financial statements (FOUR)

1

12

1

2

3

4

Income StatementRevenues-ExpensesNet Income

Lesson 4 | Inventory & PayablesInventory costing methods

ACCT for Inventory

Lesson 5 | Fixed& Intangible Assets

Lesson 6

Net Book Value = $1,000

Property, Plant, & Equip

Other inventory issues

Recording transactionsAdjusting entries

Qualitative characteristics | primary qualities (TWO)

RelevanceInfo capable of making a difference in a decision-Predictive value -Predict outcomes of past, present, & future events-Confirming value -Feedback can be used to set expectations-Materiality -Inclusion/omission would influence judgement

For info to be relevant, it should have predictive or

confirming value, & be material for the reporting entity.

Revenue recognition

Receivables

Sole proprietorsPartnershipsCorporationsLLC's

LIFO & FIFO

Primary advantageis tax benefit

Older, lower acquisition Px matched w/ higher sales Px

Current, higher acquisition Pxmtchd w/ curr, higher sales px

Inventory is valued usingolder lower acquisition Px

Inventory is valued using current (higher) acquisition Px

Increase on the

Capital marketProduct marketGovernmentInternal users - execs

Straight-Line Depreciation

example

example

$10k asset has salvage of $1k, use life is 3 years=(10000 - 1000)/3 = 3000 per year

Balances +10,000 -9,000 -9,000

Depreciation Expense = Asset Cost - Salvage ValueEstimated Useful Life

Natural Resources

2 Double Declining BalanceDepreciation Expense =

Determine by taking the straight-line rate of depreciation and double it. Example: Asset w/ 4-year life = straight-line rate 25%, calc'd by 100%/4years. The straight-line rate doubled = 50%. Asset w/ a 5-year life would = 20% straight-line * 2 = 40%.Doubled rate is then multiplied by Net Book Value:

Net Book Value * 2Estimated Useful Life

Depreciation Expense = =

Depreciation rate * Net Book Value(Straight-line rate *2)* (Cost - Accumulated Depreciation)

Stmt of Retained EarningsBeginning RE+ Net IncomeEnding Retained Earnings

Stmt of Cash FlowsBeginning CashOperating ActivitiesInvesting ActivitiesFinancing ActivitiesNet Change in CashEnding Cash

Lower of Cost or MarketWhen future revenue-producing ability < purch Px the inventory asset write down will reflect loss -Ensures inventory is not overvalued -Accelerates future losses to current Inc StmtCompare historical cost (balance sheet value) to Market Value. Report the lower of the two. -Market value is cost to replace inventory today

AccrualRecognizes economic events in the period in which they occur

Net realizable value

Income Stmt

Percentageof credit

sales

Aging ofAccounts

Receivable

Amount the company expects to collect (GAAP Requirement)

Allowance method | Bad Debt Expense (BDE)Recognize BDE in the period of sale by estimating doubtful accounts -Record estimate in contra-asset acct "Allowance for Doubtful Accts"

Estimate results inBad Debt Expense

-Estimate results in balance of allowable account -Bad Debt Expense is a "plug"

Aging of AR methodEstimate how much of the ending balance of AR is bad debt -Amount becomes ending balance of Allowance for Bad Debt -Based on the age of account making up ending bal of AR

Percentage of sales methodBad debt is estimated as a % of credit sales that occured during the period -Percent is based on historical trends & company policies

-As extracted the asset is depleted and transferred to inventory-As sold the expense is Xferred toincome statement as COGS Exp

Intangible Assets-Lack physical existence-Not financial instruments-Normally classified as long-termassets

Effective/stated rates-Effective = market rate, or yield-Stated = Specified on the face ofthe bond.

CashRecognizes economic events when cash has been exchanged

Ignores revenue recognition & matching principlesNot in conformity with GAAP

Balance Sheet--Assets--CashInventoryPPETotal

--Liabilities & Equity--A/PLT DebtEquityTotal

Acquire PP&EYear 1 depreciationYear 2 depreciationYear 3 depreciation

+10,000-6,667-6,667-2,222-2,222-111-111

BALANCE SHEET ASSETS

PP& E ACCUM. DEPR

INCOME STATEMENT

DEPR. EXPENSE

Balances +10,000 -9,000 -9,000

DOUBLE-ENTRY ACCOUNTING

DETAILED EXAMPLES

DETA

ILED EXA

MPLES

recognized/recorded when BOTH

Recognition @ time of sale provides a uniform/reasonable test

Recognition Principle: Revenue should berecorded when a resource has been earned

*General Rule

EXAMPLES

EXAM

PLES

Balance Sheet% of current credit

sales is matched with current sales revenue as bad debt expense

Allowance does not necessarily reflect the

receivables that are uncollectible

Bad debt expense is a plug to force

allowance for bad debt to the proper

balance

Allowance for Bad Debts is calculated based on balance in Accounts Receivable

Interest Expense Cash Bonds Payable

AssetLiabilityEquityRevenueExpenseDividendsTotals

Amount

AmountAmount

Total DRs

AmountAmountAmount

Total CRs

Trial Balance Form-17.50

Cash Common stock

Issue 3000 shares of common stock for $15,000

Assets = Liabilities + Equity

15,000

+15,000 +15,000

15,000

-19.75 -19.75 =-19.75

+2.25

BALANCE SHEET

ASSETS = LIABILITIES + EQUITY

INCOME STATEMENT

REVENUE - EXPENSES = NET INCOME

1234

$491.00$493.25$495.50$497.75

$493.25$495.50$497.75$500.00

$19.75$19.75$19.75$19.75

$17.50$17.50$17.50$17.50

PERIOD

BEGINNING BALANCE

INTEREST

EXPENSE

EFFECTIVE RATE = 4%

INTEREST

PAYMENT

STATED RATE = 3.5%

ENDING

BALANCE

Bond interest: Two year semiannual bond w/ par value of $500 and a stated rate of 7% was priced to yield 8%. -Calc the issue price, find the pres value of both lump-sum principle pymt of $500 and the interest stream of $35 per year. - Pres val of principle = $427

- Pres val of interest stream = $64 - Issue price = $491

Record bond proceedsCash

491.00

Disc on Bonds Pyble9.00

Bonds Payable500.00

Record first semi-annual interest paymentCash

17.50

Cash15k

CommonStock

15k

Cash Unearned Revenue

Receive $2,000 for future servicesAssets = Liabilities + Equity2,000+2,000 +2,0002,000

Cash2k

UnearnedRevenue

2k

Depreciation Expense Accumulated Depreciation

Balance sheet: Reports a company's resources & claims against @ a given point in time.Income Stmt: Rev & Exp over period. Stmt of RE: Shows RE over period. Stmt of Cash Flows: use of $$

Equipment depreciation of $600 per monthAssets = Liabilities + Equity600-600 -600600

DepreciationExpense

600

AccumDeprec

600

Unearned Revenue Service Revenue

Serviced pre-paid client ($2k)Assets = Liabilities + Equity2,000

-2,000 +2,0002,000

UnearnedRevenue2k

SVCRevenue2k

Advertising Expense Cash

Pay $250 for advertisingAssets = Liabilities + Equity250-250 -250250

Cash250 250

AdvertisingExpense

Accounts Receivable Service Revenue

Do work and leave an invoice for $3,500Assets = Liabilities + Equity3,500+3,500 +3,5003,500

AccountsReceivable3.5k 3.5k

ServiceRevenue

Dividends Cash

Pay $1,500 in dividendsAssets = Liabilities + Equity1,500-1,500 -1,5001,500

Cash1.5k 1.5k

Dividends

Interest Expense

Debit Credit

19.75Disc on Bonds Pyblebal 9.00

2.25

-DO NOT REDUCE! cost by salvage value-STOP DEPRECIATING when salvage value is reached

Lesson 6, cont...

OR