chapter 9-11 accounting terms

how does a business finance operations

debt and equity

accounts payable are part of business’ ——- course

normal

accounts payable is —— term debt

short

durations of accounts payable

30-60 days

accounts payable vs notes payable in interest

ap has no interest, np does

accounts payable typically used for —

buying goods or services

notes payable are written ——- to pay

promises

notes payable are —— term(s)

short or long

notes payable typically used for —-

buying goods or services, borrowing money, or to pay off account payable

notes payable is a liability represented by a-

legal document called a note

note describes details such as

maker, payee, interest rate, maturity date, collateral, maturity value, face value/principal

maker is also called

borrower, payer, debtor/issuer

payee also called

creditor or lender

maturtiy value is

total due = face value plus interest

for notes payable, interest accrues how often

everyday regardless of when paid

interest calculation

principal x rate x time

issuing note journal entry ( for person borrowing)

cash- dr

notes pay- cr 

borrowing note affects finanical statements how

assets up and liability up

recognizing accrued interest expense for borrower

dr- interest expense

cr- interest payable 

recognizing accrued interest expense for borrower affects FS

equity down and liability up 

borrower paying all of note journal entry

dr- interest expense

cr- interest payable ( for accrued interest that wasnt already recorded)

notes pay- dr

interest pay- dr

cash- cr 

how borrower paying note affects FS

liability down and assets down

notes receivable is recorded on books of

lender

notes payable recorded on books of

borrower

receivables reported at

net realizable value ( gross-afda)

payables shown at

face value

merchant recording time of sale with sales tax

cash or a/r- dr

sales tax pay- cr

sales tax rev- cr

merchance recording sales tax at time of remittance

sales ptax pay- dr

cash- cr

potential obligations arising from a past event

contingent liabilities

amoutn or existence of obligation for contingent liabilities depends 

on some future events 

the likelihood of contingent liability becoming actual liability classifications 

probable and estimable, reasonably possible (or probable but not estimable), and remote

probable and estimable 

recognize in financial statements 

reasonably possible ( or possible but not estimable)

disclose in notes to the financial statements

remote

neet not recognize or disclose

warranty obligations

promises to correct deficiencies or dissatisfactions in quality, quantity, or performance of products or services sold 

warranty obligations are typically limted to

some set time period

warranty obligations are what likelihood becoming actual liability 

probable and estimable 

managers must come up with reasonable estimate based on-

past experience

recording estimate of warranties expense

warranties expense- dr

warranties pay- cr

recording settlement of warry obligation

warranties pay- dr

cash- cr

classified balance sheet separates

current ( short term) and long term assets and current and long term liabilities 

in classified balance sheet, assets must be presented in order of

liquidity

classified balance sheet must provide a ———- of current vs non current balances 

subtotal

line of credit and contingent liabilities are what —- liabilities

current

long term liabilities examples

unearned revenue and bonds payable 

fixed interest rates

interest rate remains constant over life of loan

variable interest rates

interest rate that fluctuates from period to period over life of loan

different debt agreements for payments include

paying all interest and principal at maturity

paying interest regularly but principal on maturity date 

pay both interest and principal regularly 

repaying a portion of principal with regular payments that also include interest is often called —— 

loan amortization

discount on bonds payable is the difference between the face value of bond and the amount it was paid for assuming sold —— face value

below

discount on bonds payable account

contra liability

normal balance for discount on bonds payable

debit

premium on bonds payable is the difference between the face and amount it was paid assuming it was sold ——— face value

above

premium on bonds payable account

liability

normal balance for premium on bonds payable

credit

bonds payable

face value of bond issued regardless of amount it was sold for 

bonds payable account

liability

bonds payable normal balance

credit

financing with debt means the company uses one of the following—- (3)

line of credit, installment notes, and bonds

capital structure is a mix of —— used to finance the company

debt and equity

line of credit

short term borrowing on as needed basis

installment notes

used in order to borrow small amounts of capital for shorter periods of time that require regular payment of principal and interest over life of the loan

bonds are used in order to

borrow large amounts of money for longer perios of time

bonds are issued by 

governmental units or corporations 

lines of credit usually have ——- limit on amount borrowed

some

line of credit usually has a —— interest rate

variable

line of credit ters are usually how long

one year but renewed from year to year

line of credit is classified on balance sheet as ——- term

short

person starting line of credit journal entry for when it starts

cash- dr

notes pay line of credit - cr ( for what it says borrowed)

person starting line of credit journal entry for end of month payment

interest expense- dr

cash- cr ( for interest amount)

person starting line of credit pays back journal entry

notes payable line of credit- dr

cash- cr

long term notes are re paid in

installments

for long term notes, with each subsequent payment the portion of payment used for interest is —— and portion used for principal is ——

reduced , increased 

installment notes payable duration

2- 5years 

installment notes dollar amount of total payment is ——

fixed

in installment notes, a portion is used for payment of interest and remaining used for 

principal

principal part of payment for installment notes equation

total payment- interest 

amortization table shows

amount of each payment that represents interest and principal 

issuing insallment note journal entry

cash- dr

installment note pay- cr 

issuing installment note affects to FS

assets and liabilities up

making payment for installments journal entry

interest expense- dr

installment note payable- dr

cash- cr 

making payment for installments affects FS

assets, liab, and equity down

how to do amortization table

identiy oustanding principal

calculate amount of payment that represents interset expense

calc amount of payment for the principal ( total amount - amount for interest)

calculate new oustanding principal balance

bond certificates

companies borrow money directly from public by selling bond certificates, desrives companies obligation to pay interest and principal

bond financing is most common form of 

long term debt 

bonds are typically—— term

long ( 10 years or more)

most common face value of bond increments

1000$

interest paid for bonds is typically paid ——

annually, semi annually, or quarterly

for term bonds, principal is paid back as a

lump sum at end of period

for serial bonds, principal is paid back in

installments

bonds can be sold on the

market

advtanges of bonds

longer term commitments

interest rate lower thank bank 

public willign to accept higher risk for return

access to networking 

tax benefits 

disadvatanges of bonds

legally bound to spceificied interest rate

failure to satisfy bonds cna put company into bankruptcy 

bonds holders may have claims to firms assets in bankruptcy

bond indenture

contract between bondholders and company

issuing bond journal entry

cash- dr

bonds pay- cr 

issuing bond journla entry affects FS

assets and liab up

bonds carry a —- rate of interest

state

interest expense for bonds journal entry

interest exp- dr

cash- cr 

interest expense for bonds journal entry affects FS

assets and equity down

redeeming bonds on maturity date journal entry

bonds pay- dr

cash- cr