Friday, October 23, 2009

Purpose of Accounting Journal Entry

Accounting Journals can be classified as specialized journals (Generally, these are Sales Journal, Returns Inwards Journal, Purchase Journal and Return Outwards, Cash Receipt Journal, Cash Payment Journal) or as a General Journal

Accounting Journal Entries serve several main purposes or roles in the accounting cycle

  • Removes unnecessary details in the ledger as only totals are posted to the main accounting ledger. 
  • An accounting journal entry records similar transactions such as credit sales of goods into one book in order of their occurrence
  • Provides an important middle step between source documents and the ledger accounts for accountants to examine, AND
  • Serves as an aid for posting to the general ledger by analyzing a transaction into its debit and credit entry to see exactly which main journal accounts are affected .

Tuesday, October 20, 2009

What is a support department?

In a large corporation, a support department, which can also called a service department, usually provides the services that assist other internal departments operate the company. Some common examples of support departments are information technology, landscaping, maintenance, and parking services.

When allocating the costs of a support department to operating departments or divisions managers should consider these ideas:

  1. Should accounting fixed costs of support departments be allocated to specific operating divisions?
  2. When fixed costs are allocated, should variable and fixed costs be allocated in the same way?

Thursday, October 15, 2009

Capital Budgeting Practice Problem

The company will wind up its business in 8 years.The plant, property and equipment will worth  $ 2000 as a salvage value at the time of winding up the business.

The project costs $40, 000 to launch and opportunity cost associated with this project is 15 % .

Using capital budgeting techniques, is this a good investment for the company?

Accounting Answer:

First, look at the  cumulative cashflows Year 1 to 8 (30) (20) (10) 0 10 20 30 42

Then, this is not a good investment because the payback period is 4 years. The project does not have positive cumulative cash until year 5. Next, the net return after 8 years is 42 on an investment of 40. Less than 15% p.a. return

Therefore, the company should not undertake this project because it would be better off putting its money somewhere else that is more profitable.

Monday, October 12, 2009

Contra Asset Liquidation Bankruptcy

How do you account for a contra asset on the balance sheet when a company is undergoing liquidation or bankruptcy?

Generally, a contra account is for depreciation or a provision for bad debts on the general ledger.

When undergoing bankruptcy or a liquidation, the asset book values are debited to a realization account and the provisions credited to the account. The balance of the realization account will now be the NBV of those assets.

As these assets are sold DEBIT cash and CREDIT realization account.

For a further example, a common contra asset account on an asset sold would be Accumulated Depreciation, as well as Allowance for doubtful debts.

Where you have a liquidation account on the part of the liquidator, the balance on the realization account in the case of a liquidation will be split between the interested parties in accordance with the prevailing company's liquidation laws or bankruptcy laws.

Thursday, October 8, 2009

Debit Memorandum Definition

What is a Debit Memorandum?

A debit memorandum is usually a:

  • A document given by the bank to a depositor that notifies them that the depositor's balance is being decreased due to some event other than the payment of depositor originated check, e.g. bank service charges or overdraft fee; or
  • A document used by a seller to notify a buyer that the seller is debiting the amount of the buyer's accounts payable due to errors or other factors requiring adjustments that the buyer was not aware of before.
The debit memorandum serves an informative purpose and hopes to correct all parts of the accounting information cycle. 

Notes to Financial Statements

What kind of information do accountants include in notes to the financial statements?

Even though they might be below the income statement, notes to financial statements are very important and explain ambiguous terms, accountings standards, and methods used to present these financial statements. Notes to financial statements provide clarity to the user of the financial statement.

These notes typically contain this type of information:

  • Accounting Principles adopted by the company (nature of business, Accounting policies)
  • Dividends due to shareholder
  • Details about Property, equipment & Plant
  • Depreciation methods and details
  • Forecasts, Budgets
  • Account Receivable and other Receivables
  • Longterm Debt details (Amortization)
  • Dividends due to shareholders
  • Authorized, Issued and subscribed capital
  • Employees Fund, Pension Plan
  • Contractual Obligations
  • Contingent Liabilities

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.