Tuesday, January 27, 2009

Definition of Depreciation Summary

  • Depreciation is an allocation of capital expenditures over the estimated revenue producing period of a long term asset. This is required due to the matching principle.
  • Depreciation is a determined by acquisition cost, useful life, depreciation rate, and estimated salvage value.
  • Depreciation does not involve the cash account Only the purchase and disposal of assets involve cash account
Additional Links to Accounting Problems and Examples:
Asset Historical Cost Examples
Straight Link Depreciation Example
Depreciation of an Asset and Book Value

Monday, January 26, 2009

Net Income Cash Flow Adjustment

Follow these steps to adjust net income for use in a Cash Flow Statement

Net Income Adjustments
  1. Adjust for Non-Cash Changes in Current Accounts
  2. Adjust for Non-Cash Changes in Non-Current Accounts
  • Add Depreciation & Amortization
  • Add Loss on Sale of Assets
  • Subtract Gain on Sales of Assets

Thursday, January 22, 2009

Legal Fees Stock Issuance

What is the accounting treatment of legal fees incurred by a company relating to a stock issuance?


A company will use the share capital account to record these fees. The  initial measurement of share capital reflects the net proceeds from issue, defined as the FMV  of the consideration received.

This is all calculated net of transaction costs directly attributable to the equity transaction. All of this conforms to accounting regulation  IAS32R.35. On the other hand, shares of company stock that are issued for cash are recognized at the amount of the net cash proceeds.

Wednesday, January 21, 2009

FIFO Method Weighted Average Method

Which accounting method is better for manufacturing firms to use for cost control, FIFO or weighted-average method?

Accountants often consider the FIFO method superior to the weighted-average method for cost control in managerial accounting environments. The reason for this is current performance should be measured in relation to costs of the current period only.

The weighted-average method mixes these costs in with costs of the prior period. Thus, under the weighted-average method, the department’s actual performance in the current reporting period is affected by what has happened previously in earlier periods.

Wednesday, January 14, 2009

Security Deposit Journal Entry

What should the accounting account category be for the offset of security deposits when they are returned?

If the original deposit was charged initially to the Prepaid Expense, or Deposits account, the correct journal entry would be to credit that account for the original deposit, debit Cash for the amount returned, and then finally debit Cleaning or Maintenance expense for the balance.

Tuesday, January 13, 2009

Adjusting Entries Deferral Example

Deferral Example:  Prepaid Expenses – These are assets that represent amounts paid in advance for something that will be used later.  They generally include insurance, supplies, advertising, and rent.  The company pays for these before using them to generate revenue or use them for other purposes.

Deferral Example: Plant Assets (Property, Plant, and Equipment -- PPE) – When an asset that will be used in business operations for more than one year is acquired, the cost is debited to the asset account.  Depreciation is then calculated and represents the allocation of the cost of the plant asset.  Other examples of plant assets include buildings, equipment, autos and furniture.

Deferral Example:  Unearned Revenue This is a liability account that represents the receipt of cash before the revenue has been earned.  The company receives payment for goods or services before it has earned the revenue and can properly account for it.  A liability exists because the company either must deliver the goods or provide the services or it must refund the payment.

Determinants of Bond Yield

Corporate Bonds inherently contain certain risks that investors most know and be cautious about when choosing to invest in bonds. The following table contains the most common risks that are determinants on bond yields.

  • A taxability premium compensates for unfavorable tax status of certrain classes of bonds
  • An Interest Rate Risk Premium compensates for holding securities for the long-term when their prices are more sensitive to interest rate changes
  • An Inflation premium compensates investors for the known fact that prices rise in the future and decrease purchasing power
  • A Liquidity Premium compensates for holding securities that are difficult to convert to cash at their true value
  • The Default Risk Premium compensates for the possibility that the issuer is unable to meet the required interest or required principal payments.
A combination of all these premiums are determinants of bond yields

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Monday, January 12, 2009

Definition of quantity schedule

Accounting Definition of quantity schedule:

A quantity schedule summarizes and displays the physical flow of units produced through a department during an accounting period.

Its serves a company several mains purposes:
  • Quantity Schedules provide information about manufacturing activity within the specific department and shows the current stage of completion of in-process units
  • A Quantity Schedules provides the data required for calculating equivalent units and for preparing the other parts of the production report for a product and/or department

Sunday, January 11, 2009

Definition of Bank Statement

Definition of a Bank Statement

A bank statement is a detailed statement issued by a bank showing a client's bank account balances according to the bank record. Most banks send their customers statements by mail or email month.

Customer can then check their funds available in the bank and to update their own records of transactions that have occurred. It is important that the customer check their bank statement for errors. A customer may have less money in their accounts than they think due to bank charges and fees or other errors.

Monday, January 5, 2009

Common Trial Balance Errors

When the trial balance does not balance, the accountant must find the errors and correct them. the following steps are suggestions on how to correct errors in the trial balance.

  • Double check the trial balance columns to see if they are added together correctly
  • Check if debit accounts or credit accounts are placed on the trial balance by error
  • Recompute each account balance in the accounting ledger.
  • Ensure that account balances are correctly entered from the accounting ledger.
  • Verify that each journal entry is posted in the trial balance.
  • Double Check that each original journal entry has equal debits and credits on the ledger.
Additional Accounting Information:

Information on the Accounting Cycle
What is a Trial Balance?

Sunday, January 4, 2009

Characteristics of Debt Securities

There are many features of Debt Securities such as bonds that make them unique:
  • Bonds have a superior liquidation claim in bankrupty than equity securities (stocks)
  • Interest on debt is tax deductible
  • Debt Securities represent funds borrowed by a firm
These securities represent funds borrowed by the firm instead of equity securities such as stocks that represent ownership in the firm. Owning bonds do not allow voting rights in a firm like equity securities. One advantage of debt securities is that interest paid on the debt is tax deductible by the company. Lastly, debt holders have more priority over equity holders if the firm is liquidated due to bankruptcy. These characteristics of debt securities make them attractive to investors.

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Saturday, January 3, 2009

Advance Payments Unearned Rent

A Rental Company reported these two different balances in their Unearned Rent account at the beginning and end of 2007:

Jan. 1, 2007 =$2,600
Dec. 31, 2007 = $3,200

If rent revenue for 2007 was $26,300, how much cash was received by the company as advance payments for rent due in 2007?

Answer: $26, 900

Friday, January 2, 2009

Net Income Practice Problem

Use the following data below to calculate net income for this company:

  • Sales, $920,000
  • Cost of merchandise sold, $560,000
  • Administrative expenses, $30,000
  • Rent revenue $20,000
  • Interest expense, $10,000
  • Sales returns and allowances $65,000
  • Selling expenses, $110,000

Answer: Net Income= $165,000

How to Calculate Net Income

Thursday, January 1, 2009

Asset Historical Cost Examples

In financial accounting and managerial accounting, all assets are recorded on the balance sheet and depreciated at their historical cost.

In accounting, a historical cost is considered the purchase price plus any additional costs necessary to obtain the asset, prepare it for use, and transport. Additional costs related to an asset include costs besides the purchase price include transportation costs, insurance for asset delivery and others.

Below is a list of additional costs related to the purchase of an asset that may be included in the historical cost of an asset:

  • Purchase of equipment will include the purchase price. Plus additional costs will include delivery costs, installation, set-up costs, and the cost of modifications.
  • Purchase of a building will include the purchase price. Additional cost will include title search, title transfer documents, legal fees, inspections costs, and real estate commissions.
  • Purchase of land will include the purchase price. Additional costs will include demolition of old buildings, title search, government fees and real estate fees.
The historical cost must be used in asset depreciation.

Example depreciation problem with historical costs.

Popular Accounting Problems

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.