Acct 229 Final TAMU

Materiality

The dollar magnitude of the transaction makes a difference in how it is recorded. Record as an expense not an asset. No party would be mislead.

Ex. buying a 10 dollar trash can

Monetary Unit

Only transactions that can be expresses in terms of money can be included in the accounting records.

Time Period Assumption

The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the income statement for a specific time period.

Going Concern Assumption

The company will not go out of business in the near future.

Historical Cost Principle

Record assent at the cost paid to acquire them.

Understandability

Information should be comprehensible to those who are wiling to spend time to understand it.

Consistency

Allows comparisons within a company from one accounting period to the next. Once we select an accounting method stay with it.

Comparability

Allows users to analyze two or more companies and look for similar differences. Compare to other companies.

Accounting Equation

A=L+SHE

Statement of Retained Earnings

Beg Re

+ Net Income

+ New Stock - sometimes

- Dividends

= End Re

DEAD

Debits increase expenses, assets, and dividends.

Gross Profit Ratio

Gross Profit/ Sales

Profit Margin

Net Income/ Sales

Cash

Current Asset

Marketable Equity Security

Current Asset

Accounts Receivable

Current Asset

Inventory

Current Asset

Supplies on hand

Current Asset

Prepaid Expenses

Current Asset

Land

Noncurrent Asset

Building

Noncurrent Asset

Equipment

Noncurrent Asset

Furniture and fixtures

Noncurrent Asset

Machine and vehicle

Noncurrent Asset

Accumulated Depreciation

Noncurrent Asset and Contra Asset

Patent

Intangible Asset

Trademark

Intangible Asset

Copyright

Intangible Asset

Franchise

Intangible Asset

Goodwill

Intangible Asset

Account Payable

Current Liability

Wages Payable

Current Liability

Unearned Revenue

Current Liability

Note Payable

Current Liability

Note Payable LT

LT Liability

Moragage Payable

LT Liability

Bonds Payable

LT Liability

Common Stock

Stock Holders Equity

Retained Earnings

Stock Holders Equity

Freight out

Operating Expense

Bad Debt expense

Operating Expense

Allowance for doubtful accounts

Contra Asset, what we expect not to collect

Working Capital

CA - CL

Current Ratio

CA/ CL

Multistep Income Statement

Sales Revenue

(Sales return and allowance)

(Sale discount)

-------------

Net Sales

(COGS)

-------------

Gross Profit

(Expenses)

+ Gain

+ Interest Revenue

(Loss)

(Interest Expense)

-------------

Net Income

Revenue Recognition Principle

Tells us when to record revenues. Record revenues when the earning process is complete regardless of when cash is received.

Ex. delivered the goods or preformed a service

Matching Concept

Tells us when to record expenses. Match revenue earned with expenses incurred in the same accounting period when the expense helped to generate revenue.

Deferrals

The company has received or paid cash, but the revenue or expense will be earned or used up in a future accounting period.

Accruals

Record revenue or expenses when earned or used up (NOW). Cash will be received or paid in a future accounting period.

Temporary Accounts

Revenue, expenses, dividends, purchases

Gross Profit Formula

Rev

(COGS)

Statement of Stockholders Equity

Beg SHE

+ New stock

+ NI

- Div

--------------

End SHE

Definition of goodwill

Cost to purchase - FMV

Closing entires

Revenue

---- Income Summary

Income Summary

---- COGS, Exp

Income Summary

---- Retained Earnings

Retained Earnings

---- Dividends

Deferred Revenue

Unearned revenue

Deferred Expense

Prepaid expense

Accrued Asset/ Revenue

Interest receivable, rent receivable

Accrued Liability/ Expense

Wages payable, interest payable

SHE is increased with a

Credit

Net Sales Formula

Sales revenue

- Sale return and allowance

- Sale discount

---------------------

Net Sales

2/ 10 net 30

If you pay within 10 days you will get 2% off, or pay in full in 30 days

Perpetual Method

- Keeps a running total of the inventory

- Recognizes a loss

- Inventory account

Perpetual journal entires

- Purchase

Invt

----Acct pay

- Sale

Cash

----Sale rev

COGS

----Invt

- ADJ

Losse

----Invt

Periodic Method

- Update at end of period

- Use COGS formula

- All items purchased for resale are debited to purchases

Periodic journal entires

- Purchase

Purchase

----Acct pay

- Sale

Cash

---- Rev

- ADJ

EI

COGS

----BI

---- Purch

COGS Formula

Beg invt

+ Net purchases

----------------

GAS

- End invt

----------------

COGS

Net Purchases Formula

Purchases

- Purchases returns and allowances

- Purchase discount

+ Freight in

------------------

Net Purchases

FOB Shipping

- Buyer pays shipping

FOB Destination

- Seller pays for shipping

FIFO

- Advantage: ending inventory is most recent purchases

- Disadvantage: if prices are rising, matches oldest unit costs with current revenues = overstatement of net income = inventory profits

LIFO

- Advantage: in periods of rising prices, net income is always less = lower taxes

- Disadvantage: noncurrent value to inventory

Units sold x Sale price

Net Sales

Cash Equivalents

- 3 months or less

- Treasury bills

- Commercial paper

- Certificate of deposit

- Money market funds

- NEVER STOCK

Balance per Bank

- ADD: Deposit in transit, bank errors

- LESS: Outstanding checks, bank errors

Balance per Book

- ADD: Notes collected by bank, interest collected, book errors

- LESS: NSF checks, service charges, overdraft charges, book errors,

NRV

Net reliable value - what you expect to receive in cash

AR

(ADA ending balance)

-------

NRV

Income Statement Method

- Est % of credit sales = BDE

- Follows matching

BDE

----ADA

Balance Sheet Method

- Est % of end A/R = end ADA

BDE

----ADA

Accounts Receivable Chart

Beg balance

+ Credit sales

+ Reinstate previous write off

- Cash received

- Write offs

- Collect on previous write off

Allowance for Doubtful Account Chart

Beg balance

+ Reinstate previous write off

+ BDE

- Write offs

Journal entry to write off A/R as uncollectible

ADA

----AR

Journal entry to collect on a A/R previously written off

AR

----ADA

Cash

----AR

Borrower/ issuer journal entires

- 12/1

Acct pay

----Note pay

- 12/31

Int exp

----Int pay

- 2/29

Int exp

Int pay

Note pay

---- Cash

Lender journal entires

- 12/1

Note rec

----Acct rec

- 12/31

Int rec

----Int rev

- 2/29

Cash

----Note rec

----Int rec

----Int rev

What effect does writing off an uncollectible account have on total assets (NRV) and net income

No effect

What affect does BDE have

- Net income decreases because recording an expense

- Total assets decrease because contra asset

Direct write off method

- Violates matching because you wait until you can identify the bad debt customer to record it as an expense

Depreciable asset

Plant and equipment

Cost of land

- ADD: Cost to buy, sales commissions, back taxes, title fees, title insurance, legal fees, any land preparation cost, shipping, installation

- LESS: salvage value

- Cost incurred to bring the asset into its productive capacity

Land improvements

- Fence, driveway, parking lot

Building

- Closing cost, broker fee, commission, remodeling cost, interest (if being constructed)

Equipment

- ADD: Invoice price, freight in, installation cost, trail run, sales tax

- LESS: Discount

Straight line depreciation/ Formula for yearly depreciation expense

Cost - salvage

----------------

# of years in useful life

Max about to be depreciated

Cost - salvage

Units of production

Cost - salvage

----------------- Cost per unit

# of units in useful life

-

Cost per unit x # of units produced in current year = dep exp

Book value

Cost

(AD)

Journal entry for a gain

Cash

AD

----Asset at cost

----Gain

Journal entry for loss

Cash

AD

----Asset at cost

Loss

Amortization of intangibles

- Straight line depreciation

- Lessor of legal life and useful life

- Expense all R&D cost do not add to asset

Record interest baring note at issuance

Cash

---- Note pay