Key Concepts in ACCT 2301 Accounting Principles

Basic accounting equation

Assets = Liabilities + Stockholders' Equity. It shows that company resources are financed by creditors or owners. Example: If assets are $100K and liabilities are $60K, equity is $40K.

Effect of paying a cash dividend on Retained Earnings

Dividends decrease Retained Earnings (and cash). Dividends are distributions of profit, reducing retained earnings. Example: Paying a $5K dividend reduces cash and retained earnings by $5K.

Effect of issuing common stock for cash on Retained Earnings

No — issuing stock increases Common Stock (and cash) but does not affect Retained Earnings. Stock issuance is equity financing, not profit distribution. Example: Issuing $10K of stock increases cash and common stock by $10K.

Three sections of the Statement of Cash Flows

Operating, Investing, and Financing activities. They separate cash flows by source and use for clarity. Example: Customer receipts (operating), buying equipment (investing), issuing debt (financing).

Effect of expenses on Stockholders' Equity

Expenses decrease Net Income, which reduces Retained Earnings. Expenses lower profits, reducing equity available to owners. Example: Recording a $2K rent expense reduces retained earnings by $2K.

Paying salaries in Year 2 for Year 1 work

No effect — expense was recognized in Year 1; only cash and liability change in Year 2. Accrual basis matches expense to the period incurred. Example: Paying a $1K accrued salary reduces cash and payable, no new expense.

Recording accrued interest at year-end

Debit Interest Expense; credit Interest Payable. To match interest cost to the period incurred under accrual accounting. Example: Accruing $500 interest expense increases expense and payable.

Difference between Net Income and Net Cash from Operations

Net Income uses accruals; Net Cash from Ops includes only cash receipts/payments. Income includes non-cash items; cash flow shows actual cash. Example: Depreciation lowers net income but is added back in operating cash flows.

Revenue recognition under the accrual basis

When it's earned (services performed), regardless of cash receipt. To match revenues to the period service is provided. Example: Earned $1K service but cash is received later; revenue is recognized now.

Prepaying rent for a year

A deferral: increase one asset (Prepaid Rent) and decrease another (Cash). Cash paid in advance creates an asset to use over time. Example: Paying $12K rent creates a $12K prepaid rent asset.

Recording insurance expense over a one-year prepaid policy

Each period: debit Insurance Expense; credit Prepaid Insurance. To allocate cost as expense over the coverage period. Example: Monthly expense: debit $1K insurance expense; credit prepaid insurance.

Recording supplies used at period end

Debit Supplies Expense; credit Supplies. To match usage expense to the period it was consumed. Example: Used $200 of supplies: debit supplies expense $200; credit supplies.

Recognizing revenue when cash was received in advance

Debit Unearned Revenue; credit Service Revenue as work is performed. To recognize revenue only when earned, not when cash received. Example: Performing $500 of service reduces unearned revenue and records revenue.

Cost of Goods Sold under a perpetual system

On the Income Statement as 'Cost of Goods Sold.' COGS reflects expense of inventory sold at the time of sale. Example: Sale of $1K goods with $600 cost records COGS $600 immediately.

Transportation Costs

Added to Inventory cost (asset); not an operating expense.

Gross Margin Calculation

Net Sales − Cost of Goods Sold.

FOB Shipping Point vs. FOB Destination

Shipping Point: buyer pays (adds to inventory). Destination: seller pays (Freight Out).

FIFO vs. LIFO in Rising Prices

FIFO: lower COGS, higher ending inventory; LIFO: higher COGS, lower ending inventory.

Weighted Average Cost per Unit

Cost of Goods Available ÷ Units Available for Sale.

Lower of Cost or Market Rule

Write inventory down when market < cost; record loss.

Days to Sell Inventory

365 ÷ Inventory Turnover Ratio.

Cash Receipts from Issuing Stock

Financing activities (inflow).

Cash Paid to Purchase Land

Investing activity (outflow).

Cash Receipts from Customers and Payments for Expenses

Operating activities.

Bad Debt Expense under Allowance Method

Debit Bad Debt Expense; credit Allowance for Doubtful Accounts.

Interest on a Note Receivable Formula

Principal × Annual Rate × Time (in years).

Receivables Turnover Ratio Formula

Net Credit Sales ÷ Average Accounts Receivable.

Days Sales Outstanding (DSO) Formula

365 ÷ Receivables Turnover Ratio.

Allocating a Lump-Sum Purchase

Allocate by relative fair-value percentages of total.

Straight-Line Depreciation Formula

(Cost − Salvage Value) ÷ Useful Life.

Journal Entry for Disposing of an Asset with a Gain

Debit Cash & Accumulated Depreciation; credit Asset Cost and credit Gain on Sale.

Debit Cash & Accumulated Depreciation; credit Asset Cost and credit Gain on Sale.

Removes asset and accumulated depreciation, records gain.

How is depreciation treated in the Statement of Cash Flows?

Added back to Net Income in Operating Activities.

Year-end accrual of interest on a note — journal entry?

Debit Interest Expense; credit Interest Payable.

How to compute partial-period interest for notes?

Principal × Rate × (Months÷12).

Recording sales tax collected from customers?

Debit Cash; credit Sales Revenue and Sales Tax Payable.

Classify a note payable due in 10 years on the balance sheet.

Long-term liability.

What defines current vs. noncurrent on a classified balance sheet?

Due within 12 months = current; beyond = noncurrent.

Issuing a note payable for cash — journal entry effect?

Debit Cash; credit Notes Payable.

Splitting an installment payment into interest & principal?

Interest = carrying amount × rate; principal = payment − interest.

How is bond interest expense recognized when bonds are issued at face value?

Face Value × Stated Rate.

Where do bond proceeds appear on the Cash Flow statement?

Financing activities (inflow); interest payments in Operating activities.

How do you close revenue accounts at year-end?

Debit each Revenue account; credit Retained Earnings.

How do you close expense accounts?

Debit Retained Earnings; credit each Expense account.

How do you close Dividends?

Debit Retained Earnings; credit Dividends.

What goes into the Statement of Changes in Stockholders' Equity?

Beginning balances, plus Net Income, minus Dividends, plus Stock Issuances → Ending balances.

What is an Asset Source transaction?

Increases assets and claims (liabilities or equity).

What is an Asset Exchange transaction?

One asset exchanged for another.

What is a Claims Exchange transaction?

One claim exchanged for another.

What is an Asset Use transaction?

Asset is used up — decreases asset and claims.