Thursday, November 19, 2009

Purchase Equipment Journal Entry

Company's will often purchase equipment with a cash down payment and the rest will be financed by credit. It will be important to update the general ledger in order to know when to make payments and how much the equipment is worth.

Accounting Journal Entry Example:

Type of Journal Entry
Account titles
Purchase of Long Term Asset with mix of cash for down payment and credit
Accounts Payable


Friday, November 13, 2009

What is Accounting Work Sheet?

A work sheet is a preparation tool used by accountants to help them produce financial statements. They are normally only used within the company and will not be shown to outsiders. In todays computer economy, many are prepared on computer spreadsheet programs such as Excel.

Monday, November 9, 2009

Liabilities and Legal Contingencies

In late November 2011, as accountants are closing the books for the fiscal year, they note several outstanding legal issues that the company has not resolved.

One issue is an FDA pending fine related to problems with a new product.

A second item involves an EEOC wrongful discharge case by a former employee.

Lastly, a current employee has filed suit against the company for compensatory damages for a work-related injury. The employee is seeking damages on the order of $2,500,000.

What the lawyer thinks:

The company's lawyer suggests that the fine may total $5,500,000 but will not be settled within the next year.

The lawyer  not think the wrongful discharge case will pass summary judgment, in which the former employee is suing for $1,500,000.

Lastly, The case involving the current employee will be settled for $500,000 in the next year.

Accounting Question: What are the journal entries that the company should recognize for the year?

Accounting Answer:

Two of the items are contingent and the third may be accrued as current year expenses.

Even if each case may be decided in the companies favor the item is contingent, this is what a contingent liability means and full provision should be made for the claims

There must be accounting journal entries for an expense of $5,500,000 and contingent liabilities of $4,000,000. This is the conservative approach required by accounting standards and will ensure that the company is able to meet its obligations.

Saturday, November 7, 2009

Administrative Expenses Ratio

Accountants use expense ratios to examine how a particular cost will relate to sales. The Administrative expenses ratio can be used to examine how administrative costs relate to the company's earnings. 

Administrative expenses ratio = (Administrative expenses/ Net Sales) × 100 

The administrative expense ratio should be compared over a good period of time with the industry average as well as compared to similar companies that work in the industry.

Generally, a low ratio is a good indicator of the company's health and a high ration is a bad indicator. 

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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.