exam 2

Types of Journal Entries

Financing

Investing

Operating

Investments by owners

Owners providing assets to the firm

Assets to the business increase (dr)

Equity to the business increase (cr)

A = L + Eq

Debits are Caused by Increases in:

Assets, Expenses

Credits are caused by increases in:

Liabilities, equities, revenues, gains/losses

Owner Withdrawals

When the owner uses a farm asset for personal use

(most likely cash)

Outside Parties

Borrowed money

Receive the money

Paying the money back w/ interest

Financing Activities

Owner → Equity

Outside parties → Liabilities

Liabilities

Receiving the loan

Paying back the borrowed money

Principal Payment

The amount of borrowed money that has yet to be paid back

Reduces the amount owed

Interest Payment

The cost of borrowing money

Accrues daily on the outstanding balance

Liabilities decrease with:

Principal payment

Expense to the business will increase with:

interest payment

Cash will decrease with:

The total payment

Interest Payable

When recording the amount of accrued interest owed

Interest Expense

When making interest payments on loans, etc.

Daily expense of borrowing money

Investing Activities

Buying and selling of assets

Assets are things w/ a longer lifespan that are purchased and used to make money

Buying an Asset

Assets to the business increase when you buy an asset

Debit to appropriate asset account

Selling an Asset

Need to consider amount of cash involved, value of the new asser being acquired, the trade-in allowance of the old asset, sometimes a gain or loss

Trade-In Allowance

The amount the buyer of the old asset is willing to reduce the price of the new asset during an exchange

Book Value

BV = Original Cost - Accumulated Depreciation

Gain or Loss

When the seller of an asset receives more or less than the book value of the asset

Gain or Loss is Measured By:

What was received (cash and trade-in allowance)

What was given up (book value of old asset)

Gain

Received > Given Up

Credit

Loss

Received < Given Up

Debit

Assets to the Business are Likely to Increase:

Sale

Exchange

Assets to the Business are Likely to Decrease:

Cash

Old asset being sold or exchanged

Revenue

Money earned from the sale of production of farm products and services

Expense

Costs of producing and selling products and services

When Revenues Increase:

Credit the account

Pay Employees

Wages expense (increase)

Taxes payable (increase)

Cash (decrease)

Forward the Employee's Taxes

Taxes payable (decrease)

Cash (decrease)

Paying Payroll Taxes for the Employer

Payroll tax expense increase (dr)

Cash decrease (cr)

Payroll Taxes

Payroll Taxes = Gross Wage × Percentage

4 Steps of Financial Transactions

Transaction analysis

Record the transaction in the journal

Post info from the journal to the ledger

Preparing a trial balance

Ledger

Updates the account balances

Trial Balance

Reports the debit and credit balances for each account for the farm business

Expected to Have Debit Balances:

Assets, expenses, owner withrawals

Expected to Have Credit Balances

Liabilities, equities, revenues, and accumulated depreciation

Accounting Systems

Cash-basis system

Accrual-basis system

Accrual adjusted approach

Cash-Basis System

Record revenue only when cash is received

Record expenses only when cash is paid

No inventory is recorded

Accrual-Basis System

Record revenue when it is earned, whether the cash has been received or not

Record expenses when they occur, whether cash has been issued or not

Inventories are a fundamental part of accrual accounting

Accrual-Adjusted Approach

Cash-basis throughout the year

Accrual adjustments at the EOY

Inventories are dealt with once a year

How many accrual adjustments for relevant accounts?

One

Current Assets

Inventories

Accounts receivable

Prepaid expenses

Current liabilities

Accounts payable

Taxes payable

Interest payable

Matching Principle

Revenues actually earned

Expenses actually incurred

Types of Inventory

Feed, crop, and market livestock

Obtained for use on the farm or for resale/sale

Raised or purchased (adjusted to expenses)

Raised inventories (adjusted to revenues)

All inventories are:

Current assets

Inventory on hand will be reported on the:

Balance sheet

Change from BOY to EOY

EOY - BOY

Accounts Payable

Expenses that are incurred but not paid

Accrued Revenues

Revenues earned but the cash has yet to be received

Depreciation Expense

Reduces taxable income

Calculate on an annual basis

Allocation of the original cost of noncurrent assets

Accumulated Depreciation

Contra-asset account

Balance sheet

The total amount of depreciation since the asset was put into use