Accounting Principles and Practices
Journal Entries for Loan Payoff
Borrowing $200,000 at 5% for 8 months starting January 1.
Interest Calculation: Interest = Principal x Rate x Time.
Interest Amount: $200,000 x 0.05 x (8/12) = $6,666.67.
Journal Entries at Payoff on August 31
Assuming interest has not been accrued:
Debit Interest Expense: $6,666.67
Credit Note Payable: $200,000
Credit Cash: Total payment = Principal + Interest = $200,000 + $6,666.67
Assuming interest has been accrued but not paid through August 31:
Debit Interest Payable: $6,666.67
Debit Note Payable: $200,000
Credit Cash: Total payment = Principal + Interest = $200,000 + $6,666.67
Inventory Costing Methods
LIFO Perpetual Method
Inventory Transactions:
1-Jul: Beginning Inventory: 15 units at $6 = $90
5-Jul: Purchase: 40 units at $6.70 = $268
14-Jul: Sale: 30 units at $201
21-Jul: Purchase: 25 units at $7.25 = $181.25
30-Jul: Sale: 30 units at $214.75
Cost of Goods Sold (COGS) Calculation
Total COGS = $415.75
Ending Inventory: $123.50
Accounting Principles
Business Entity Principle: Business transactions must be kept separate from personal transactions.
Going-Concern Principle: Assumes that an entity will remain in operation for the foreseeable future.
Revenue Recognition Principle: Revenue is recognized when earned, regardless of when cash is received.
Matching Principle: Expenses should be matched with revenues in the period in which they are incurred.
Expense Recognition Principle: Requires recognizing expenses in the same period as the revenues they help generate.
Income Calculation and Adjustments
Given a list of accounts (revenue, expense, assets, liabilities, SE, dividends), calculate net income:
Net Income Formula: Revenues - Expenses
Client Payment Adjustments
Scenario: A client pays in advance and work is partially performed, but adjusting entry is not recorded.
Result: Overstate equity, understate income, understate assets, overstate assets, understate liabilities, overstate liabilities.
Definitions of Key Terms
Depreciation Expense vs. Accumulated Depreciation
Depreciation Expense: The allocation of the cost of a tangible asset over its useful life.
Accumulated Depreciation: A contra asset account that shows the total depreciation expense to date.
Difference: One is an expense recognized in the period, while the other is a cumulative figure that reduces the value of an asset on the balance sheet.
Income Statement and Retained Earnings
Income Statement Format
Income Statement: Revenues - Expenses = Net Income.
Statement of Retained Earnings:
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings.
Balance Sheet Structure
Balance Sheet: Assets = Liabilities + Shareholders' Equity (SE).
Assets are listed in order of liquidity.
Liabilities are listed in order of due date.
Inventory Calculation with Periodic Method
Periodic Inventory Formula: Beginning Inventory + Net Purchases = Goods Available for Sale - COGS = Ending Inventory.
Purchase Discounts and Payments
Payment Terms: 3/10, net 30. Purchasing $2000 of products, returning $400, then paying within the discount period.
Calculation: Final payment = $1552.
Bank Reconciliation Process
Per Bank vs. Per Books:
End balances on the bank statement and the accounting system should match.
Adjust for deposits in transit, outstanding checks, bank errors, and NSF checks.
Inventory Costing: Weighted Average Method
Weighted Average Calculation:
Beginning Inventory, Purchases, Sales tracked continuously (example given).
Accounts Receivable (AR) Turnover
Formula: AR Turnover = Net Sales / Average AR.
Addressing Inventory Errors
Understanding the effect of beginning inventory errors on ending inventory, COGS, and net income:
Understated beginning inventory leads to overstated COGS and understated net income.
Overstated beginning inventory leads to understated COGS and overstated net income.
Bad Debt Expense Calculation
Acceptable estimation methods under GAAP:
Percentage of Sales,
Percentage of AR,
AR Aging,
Direct Write-off Method.
Allowance Method for Uncollectible Accounts
Example Journal Entry: For a write-off entry, effect on accounts should show reductions without impacting expenses or revenues.
Long-term Asset Acquisition
Expenditures necessary to prepare assets for intended use include:
Purchase price, sales taxes, transit insurance, freight charges, setup/installation, testing, employee training.
Contingent Liabilities
Definition: Potential liabilities that depend on the outcome of future events (e.g., lawsuits).
Initially disclosed but not recorded in financial statements until estimable losses arise.
Payroll Taxes Overview
Payroll Taxes: Includes Social Security (6.20%), Medicare (1.45%), and employee/employer contributions for state and federal taxes.
Adjusting Entries
Necessary for salaries, prepaid insurance, office supplies, and others to align financial statements more accurately with actual expenses and asset values.
Subsequent Events
Important events occurring after the balance sheet date but before the issuance of the financial statements must be disclosed in notes.
Auditor Opinions
Types of Audit Opinions:
Unqualified (clean report),
Qualified (some issues),
Adverse (serious issues),
Disclaimer of Opinion (unable to express an opinion).
Cash Flow Statements
Operating Activities
Adjustments based on net income, depreciation, changes in assets, and liabilities.
Investing Activities
Activities related to acquisition and sale of fixed assets and investments.
Example of Investing Activities
Sale and purchase of equipment and long-term investments covered in detail.
Financing Activities
Involves transactions that affect the equity and debt of the entity, highlighting cash inflows and outflows.
Effects on Financial Statements for Write-offs
After Write-off Analysis: Addressing effects on accounts receivable, allowance accounts, net accounts receivable, and understanding no net income impact.