Accounting Final
CHAPTER 6
Consistency principle:
a business should use the same methods
Disclosure principle:
a company should report enough information for outsiders and they should be
relevant and faithful
Materiality concept:
a company must perform strictly only for significant items
Conservatism principle:
a company should report the least figures; when in doubt record an expense instead
of an asset
Inventory costing methods:
1. Specific identification
2. FIFO
3. LIFO
4. Weighted average
Specific Identification method:
company knows exactly which item was sold and what the item cost; automobiles,
jewels, real estate
FIFO Method:
first units purchased are the first to be sold
results in highest gross profit
LIFO Method:
last units purchased are the first to be sold
highest cost of goods sold
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Weighted average method:
computes a new weighted average cost per unit after each purchase
Inventory turnover:
shows how rapidly inventory is sold
Receivable occurs when goods are sold on account.
received in cash in the future
creditor is the party who receives a receivable
debtor is the party who is obligated to pay later
Accounts Receivables are current assets and collected in 30 or 60 days
Notes Receivables are:
promissory notes
fixed amount plus interest by a certain date
maturity date is the due date
Other Receivables ; dividends Receivable, Interest Receivable, Taxes Receivable
Account Receivable
Debit Receivable : Credit Service Revenue
Control account( smith + brown)
Subsidiary account AR smith and AR brown
Recording Credit Card and Debit Card Sales
recorded same as cash sales
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a fee is usually charged by the card company
Net Method:
Date Accounts and Explanations Debit Credit
Aug. 15 Cash 2880
Credit Card Expense 120
Sales Revenue 3000
Gross method:
Date Accounts and Explanations Debit Credit
Aug .15 Cash 3000
Sales Revenue 3000
Date Accounts and Explanations Debit Credit
Aug. 30 Credit Card Expense 120
Cash 120
Bad Debt Expense
Failure of collecting on account services
Two Methods:
1. Direct write-off method
The direct write-off method of accounting for uncollectible receivables is
primarily used by small, nonpublic companies.
Accounts and
Date Debit Credit
Explanations
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Aug. 9 Bad Debt Expense 200
Accounts Receivable 200
Wrote off uncollectible
account
Record of the recovery of bad debt expense
Date Accounts and Explanations Debit Credit
Aug. 10 Accounts receivable 200
Bad Debt Expense 200
10 Cash 200
Accounts Receivable 200
Collected Cash on account
2. Allowance Method (required by GAAP)
Accounts and
Date Debit Credit
Explanations
Aug. 30 Allowance for bad debts 25
Accounts Receivable 25
Percent-of-Sales Method:
The percent-of-sales method computes
bad debts expense as a percentage of net
credit sales.
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Chapter 10: Plant Assets, Natural Resources, and Intangibles
Plant assets:
land, buildings, equipment, furniture, fixtures, automobiles
depreciation: the allocation of a plant asset’s cost over the useful time
cost principle: assets and services should be recorded at their actual value
actual cost = purchase price+ taxes+ commissions + other amounts to get the asset
ready for use
cost of land includes; purchase price, brokerage commission, survey and legal fees,
delinquent property taxes, title transfer fees, cost of clearing the land
depreciable cost = cost - estimated residual value
Depreciation methods:
straight line method
unit of production method
double declining balance method
Straight line method:
equal amount of depreciation each year
(cost - residual value)/useful life
Unit of production method:
allocates a varying amount of depreciation each year based on the asset’s usage.
depreciation per unit = (cost- residual value) /useful life in units
Double declining balance method:
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method multiplies an asset’s decreasing book value by a constant percentage that is
twice the straight-line depreciation rate.
Depletion Expense:
allocation of a natural resource’s cost to expense over its usage
debit depletion expense
credit accumulated depletion
Intangible Assets:
no physical form
patents, copyrights, trademarks, other creative works
expensed through amortization
patents:
20 year right to produce and sell an invention
copyrights:
exclusive right to reproduce and sell
trademark:
called a trade name
franchises:
privileges granted by a business
Licences:
privileges granted by a government to use public property
goodwill:
value paid above the net worth of a company’s assets and liabilities.
it is not amortized
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Asset turnover ratio = net sales / average total assets
Chapter 13 Corporations:
• A corporation is a business organized under state law that is a separate legal
entity.
Capital stock
common stock
preferred stock
stock may carry a par value or may be no-par value
stated value stock is no-par stock
Stockholder’s equity is called corporation’s equity
paid in capital
retained earnings
Treasury stock: Treasury stock is a company’s stock that it has previously issued
and later reacquired.
Chapter 14 Long Term Utilities
they do not need to be paid in one year or in an operating cycle
common long term liabilities are long term notes payable and mortgages payable
Long-term notes payable:
amortization schedule= loan payment’s allocation
beginning balance*interest rate*time
Mortgages payable
mortgages payable are secured with specific assets, and long-term notes
payable are not.
Type of bonds
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Term bonds are bonds that all mature at the same time.
Serial bonds are bonds that mature in installments at regular intervals.
Secured bonds are bonds that give bondholders the right to take specified
assets of the issuer if the issuer fails to pay principal or interest.
Debentures are unsecured bonds backed only by the creditworthiness of the
bond issuer.
Bonds may be issued at
◆ face value,
◆ below face value (discount), or
◆ above face value (premium).
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