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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