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Assets
Overview
Definition: economic resources owned by the business and are expected to benefit
future operations
Must be measurable to be recorded
Examples: cash, IOUs (accounts receivable), prepaid expenses, buildings, inventory,
etc.
Classifications
Current Assets
Current: will be used or converted to cash within the next year
Listed by liquidity (1st three are the most liquid)
Cash
Accounts receivable: oral agreement to pay
Money that people owe you
Marketable securities: investments expected to sell within the upcoming
year
Inventory
Notes receivable: written promise to pay
Example: agreement to pay back loans
Prepaid expenses (aka prepaid assets)
Non-Current Assets
Property, Plant & Equipment (PP&E)
Land
Buildings
Machinery
Vehicles
Furniture & Fixtures
Long-term investments (longer than a year)
Investments in other companies (large investments in other companies may be
listed themselves)
Intangible Assets
Patents
Copyrights
Goodwill
Valuation
Historical cost (acquisition cost)
PP&E, intangibles, prepaid expenses
Net Realizable Value: amount you expect to get from your customers
Accounts receivable
Market to market (market value)
Marketable Securities (investments), cash
Lower-of-cost-or-market
Inventory (either the lower of what you paid for the inventory or the current price
you would pay for that inventory; choose the lower number)
Non-marketable securities (an investment that is not publicly traded and so the
value is not publicly available; show what you paid for that investment or what you
would pay or that investment today; choose the lower number)
(2/1) PPE Depreciation
PP&E helps generate revenueso what would the matching principle say?
Depreciation is the systematic and rational allocation of the cost of limited PP&E to
the period in which it is used to generate revenue
Depreciation Calculation: Straight-line method
(Cost-Salvage Value)/Useful Life = Annual Depreciation Expense
(Cost-salvage value) = depreciable basis: the total amount that will be recorded as
an expense over the life of the asset
Asset cost accumulated depreciation = book value
Accumulated Depreciation = Depreciation expense year 1 + deprecation
expense Yr 2 + .
Total amount tht has been depreciated to date of the PP&E asset
Accumulated Depreciation is a contra asset because it decreases the assets value
Partial Year Depreciation:
If you purchase an asset partway through the year you only want to record
depreciation for the part of the year for which you have had that asset
Liabilities
Overview:
Liabilities debts that require a future sacrifice (usually in the form of a cash
payment)
Types of liabilities:
Accounts payable (you buy something from someone and you still owe them an
amount for that)
Borrowed funds (notes/payable/bonds payable)
Accrued amounts (e.g., accrued wages, income tax payable, etc.)
Accrued wages/wages payable: someone worked for your company and you have
not paid it out yet
Unearned revenue/deposits
Ex: newspaper company receives money for a subscription and you owe that person
a product in the future
Contingent liabilities (talk about later)
CLASSIFICATIONS of LIABILITIES:
Current liabilities those liabilities that are scheduled to be paid within one year
A/P, current portion of long-term debt (ex: pay off part of a loan within the next
year), unearned revenue, notes payable (line-of-credit), accrued expenses, income
taxes, etc.
Long-Term Liabilities (Debt)
Mortgages, bonds, notes payable, etc.
EQUITY
Takes on different names depending on the type of business entity:
Corporation
Shareholders/stockholders/owners equity
Proprietorship
Owners equity or owners capita
Partnership
Stockholders equity:
The amount of assets that the owners have claim to
The capital they invested (contributed capital/common stock
The earnings that have been retained (retained earnings)
Treasury stock: the compny can buy back shares of stock from the public
Recording transactions:
The Accounting Equation: A = L + OE
OE is made up of Common Stock (CS) and Retained earning (RE)
Retained earnings (RE) are made up of beginning revenues + net income +
dividends
NI = Rev + Exp
Paid or Payable?
If you have paid/are paying in cash
Cash decreases ($500)
Interest expense increases (^ in the negative) $500
If you have not paid in cash at the end of the reporting period, you must accrue the
interest expense
Interest payable increases $500
Interest expense increases [ in negative] ($500)
PRACTICE
Borrowed 50,000 at 8% on July 1, interest and principal are not due until February
1st. What is the interest expense for the year (assume calendar year)?
Contingent Liabilities
A contingent liability is recognized (recorded in numbers in the financial
statements) when:
It is determined that it is probable that the company will have to pay
The amount of the liability can be reasonable estimated
Estimated Expense for the Law Suit $40,000 (^ in negative)
Estimated Damages Payable $40,000
Common Stock
What is par value?
A legal amount that you have to retain within the company
According to some state laws, it is the minimum mount of money a company must
leave in the business. Corporations typically set this at a very low value so as to
have the most flexibility
If a company has no par value for its stock, it is most likely incorporated in a state
that does not require a minimum
EXAMPLE
R Co currently has 100,000 authorized shares of common stock at $10 par value
R Co issues 50,000 shares for $40 each. What is the entry?
Increase cash by $40*50,000 shares = $2,000,000
Increase common stock $10*50,000 shares = $500,000
Increase in Additional Paid In Capitol (APIC) $1,500,000
Treasury Stock
R Co repurchases 2,000 shares at $30 each
Decrease cash by 60,000
Record -60,000 in treasury stock
Contra Equity
Treasury stock is now recorded in the Shareholders Equity part of the transaction
sheet as a contra asset
Dividends
Not an expense; not on the income statement, only seen on the statement of
retained earnings
Recorded as a reduction in the retained earnings column
Dividends are payable when declared by the board of directors. The entry is
Dividends (retained earnings)
Dividends Payable (own column in the Liability section)
Later when the dividends are actually paid
Cash (decrease)
Dividends Payable (decrease)
Earned (the seller has performed a service or conveyed a product to the buyer)
Reasonably assured and measurable (the value to be received for that service or
product is reasonably assured and can be measured with a high degree of reliability)
The revenue transaction may be for cash or on credit
Matching Principle
Under accrual accounting
Expenses are expired costs assets used up to produce revenues and ae recorded
in the same accounting period in which revenues are recognized. Expenses are
matched to revenues
Revenues Expenses = Net Income
Types of Expenses
Product Costs: all costs involved in acquiring or making a product
Costs attached directly to product being sold
Expenses when product is sold
Period Costs (ex: rent, salary)
Costs that are not product costs
Expensed in period they occur
Accruals v. Deferrals
Accrual event:
Business action followed by cash exchange
Credit transaction
Deferral event
Need to abide by matching principle; record in the same time that we receive that
credit from the customers
Uncollectable Accounts
Method of estimating bad debt expense:
% of credit sales
%age*credit sales = bad debt expense
Best estimate of collectible ending balance