Sunday, December 30, 2007

What is a Mortgage Note?

What is a Mortgage Note?

When you buy a house and finance your purchase with a bank loan, you sign a mortgage agreement assigning your house as collateral.
  • A written promise to pay a stated amount of money at one or more specified future dates.
  • Secured by the pledging of certain assets, usually real estate, as collateral.
  • Generally requires periodic (monthly/quarterly) payments of principal plus interest.
Long-term obligations (notes, mortgages, bonds) usually are reclassified and reported as current liabilities when they become payable within the upcoming year (or operating cycle, if longer than a year). A mortgage note might also just be referred to as a note receivable. A note receivable is a written promise to receive a specific amount of cash from another party on one or more future dates. This is treated as an asset by the holder of the note.

Accounting Examples Related to Mortgage Notes and other Note Receivables:

Journal Entry Note Receivable
Note Receivable Interest Revenue
Journal Entries
Adjusting Journal Entry for Note Receivable

Warranty Liabilities

What are Warranty Liabilities?

Warranty liabilities arise when a seller agrees to fix a product (or service) that fails to perform as expected within a specified period. To ensure conformity and compliance with the matching principle, the seller reports expected the warranty expense in the period when revenue from the sale is reported.

Most products sold by businesses come with a warranty or guarantee. After the point of sale, the business incurs costs to service, repair, or replace a product under the terms of its warranty or guarantee. The business should forecast the future costs of fulfilling these obligations.

At the end of the accounting period, the company will show an existing liability for the warranty costs it estimates to make in future years to customers it has sold products. Supplies and labor required to honor this service agreement are recorded when service is provided to a customer. The accountant would not try to go back and correct this estimate if it proves to be wrong instead the accountant merely watches the estimates and actual service costs and adjusts future estimates accordingly. Based on the matching principle, the company needs to record the warranty
expense in the same accounting period in which it sells you the product.

Example Estimated Warranty Liability Problem

During 2004, A Small Business Hardware company introduces a new product carrying a two-year warrranty. The estimated warranty costs are 4% of dollar sales. Sales and actual warranty expenditures for the years ended December 31, 2004 and 2005 follows:

Sales Actual Warranty expense
2004 $ 800,000 $21,000
2005 $ 1,000,000 $31,000

Set up a T-account for Estimated Warranty Liability:

24000 | 32000
30000 | 40000
| 18000

The 24000 and 30000 are the actual amount of money that the hardware company used to repair the stuff and the 32000 and 40000 are found by multiplying the 4% by the sales for that year, which is the Estimated warranty liability, or the amount of money the hardware company estimates that it will need to repair the hardware product. So the company is subtracting the "actual" money used for the amount of money the company estimated it would use.

Additional Accounting Examples:

How to Calculate Net Income

Friday, December 28, 2007

Credit Sales and Purchases

What is a Credit Sale and Purchase?

Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Credit sales transactions are also known as sales on account or services on account.

Credit sales are common for large business transactions in which buyers do not have sufficient cash available or in which credit cards cannot be used because the transaction amount exceeds typical credit card limits.

However, in general, the easiest way to explain credit sales is that cash isn’t collected until sometime after the sale is made; the customer is given a period of time before it has to pay the business.

Accounts Receivables and Credit Sales

Accounting Question 1. Happy Company’s Accounts Receivable showed a normal balance of $46,300 on January 1, and $51,500 on January 31. During the month of January, they collected $78,300 from their credit customers in sales. What was the total credit sales for Happy in January?

Accounting Question 2. Happy Company’s Accounts Payable showed a (normal) balance of $76,300 on January 1, and $71,800 on January 31. During the month of January, they paid $82,900 to their suppliers. What was the total credit purchase for Happy in January?

Accounting Question 3. Happy Company’ Trial Balance on their accounting records as of December 31, 2005 reported the following accounts with their normal balances
Unearned Fees

Common Stock
$ 103,000
Interest Expense

Office Equipment

Prepaid Insurance
Office Supplies

Retained earnings

Utilities Expense

What is Utilities Expense?

1. $83,500
2. $78,400
3. $7,400

Additional Links to Accounting Problems and Examples:

Thursday, December 27, 2007

Journal Entries

The journal provides in a single location a chronological listing of every transaction affecting a company. Analyzing transactions and recording them as journal entries is the first step in the accounting process and something that every accountant must become very familiar with. A journal entry typically follows the conventional format for journal entries in that debits appear first and on the left and credits come second and are indented to the right. This is also the same with the rules for debits and credits.

Accounting Journal Entry Example

A Small Business Consulting Company provided consulting service to a business client on January 1, and then billed them for $10,000. Later on February 1, the client made one cash payment of $3,000 and signed a promissory note for $7,000 to settle the account. What is the Small Business Consulting Company's journal entry on February 1?

When the company bills a company, that implies Accounts Receivable for 10000. On feb 1, a particular client made a cash payment of 3000 the journal entry for the Small Business Consulting company would be:

Debit CASH 3000
Credit Accounts Receivable

But, of the 10000 to 'receive' only 3000 were received and the rest (7000) were settled with th note receivable (signing of the note receivable transfers the amount in accounts receivable account to the notes payable account) Therefore, the difference between the amount to receive and the actual amount received (10000-3000 = 7000) is debited to notes receivable account.

Debit Cash 3000
Debit Notes Receivable. 7000
Credit Accounts Receivable 10000

Additional Accounting Journal Entry Example

Here is another example of an accounting journal entry:

Additional Accounting Examples:


This blog is intended to be a free online accounting tutorial.It will provide problems on a range of topics including the accounting equation, credit and debits, computing owner equity, payroll expenses, cvp analysis, interest revenue, cash flows, and cost accounting. As time progresses, there will be many accounting exams and quizzes available for viewing. Questions will be mathematical and conceptual covering accounting terms and topics.

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The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.