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ACCT-112 Final Review

CHAPTER 1

 

The Accounting Equation

 

Assets = Liabilities + Owner's Equity

  • Assets are resources owned by a business (what a business owns).
  • Liabilities are claims against assets (what a business owes).
  • Owner's Equity is the claim of owners on total assets.

 

Financial Statements

 

  • An income statement presents the revenues and expenses and records net income (net loss) of a business for a specific period of time.
  • A statement of owner's equity summarizes the changes in owner's equity for a specific period of time.
  • A balance sheet reports the assets, liabilities, and owner's equity of a business at a specific time.
  • A cash flow statement summarizes information concerning the cash inflow and cash out flow for a specific period of time (students are not responsible for the cash flow in this course).

CHAPTER 2

 

 The Recording Process

 Step 1
Journalizing

 Step 2
Posting

Step 3
Summarizing information
in trial balance 

 

 

Journalizing:      Entering transaction data in the journal

Posting:              Transferring journal entries to the ledger accounts

Trial Balance:   Summarizing ending balances in every ledger account

 

 

 

 

 

 

 

CHAPTER 3

Debits and Credits

 

Normal Balance

 

Accounts

Debits

Credits

Debit

Assets

Increase

Decrease

Debit

Drawings

Increase

Decrease

Debit

Expense

Increase

Decrease

Credit

Liabilities

Decrease

Increase

Credit

Owner's Capital

Decrease

Increase

Credit

Revenue

Decrease

Increase

Types of Adjusting Entries

 

Prepayments

Accruals

Estimates

  1. Prepaid expense (Assets)

Expenses paid in cash and recorded as assets

  1. Accrual Expenses

Expenses incurred but not yet paid in cash or recorded

Amortization

Allocation of the cost of capital assets to expense over their useful lives

  1. Unearned Revenue

Revenues received in cash and recorded as liabilities

  1. Accrual Revenues

Revenues earned but not yet received in cash or recorded

Examples:

  1. Prepaid adjusting entry:

On October 1, company A pays $2400 cash to insurance company B for one-year of insurance, effective October 1. The entry to record insurance expenses for October is:

Insurance expense                                                   200

Prepaid Insurance                                                    200

Insurance expense for October is: $2400/12 = 200

 

  1. Unearned Revenue

On October 1, company A receives $3000 cash from a renter in payment of monthly rent for the period October through December. The adjusting entry to record rent earned in October is:

Unearned Revenue                                                 1000

 

Rent Revenue                                                          1000

Revenue earned in October is $3000/3 = 1000

 

  1. An accrual Revenue adjusting entry

In October, company A provides $800 of services for a customer who is not billed until November. The adjusting entry:

Account Receivable                                                    800

 

Service Revenue                                                         800

 

  1. An accrual expense adjusting entry

Company A incurs salaries of $400 during the last week of October that will be paid in November.

Salaries expense                                                          400

 

 Salaries Payable                                                         400

 

  1. Amortization adjusting entry

Company A buys a machine for $10,000 in Jan 2000. The company estimates that the machine will be used for 5 years without any residual value. The adjusting entry for machine amortization in 2001:

Amortization expense                                                2000

Accumulate Amortization                                         2000

One year amortization expense = $10,000/5 = $2000

CHAPTER 4

 

 

Preparing closing entries:

 

  1. Close revenue

Revenue                                                   xxx

Company's Capital                                xxx

 

  1. Close all expenses

Company's Capital                                 xxx

 

Advertising exp                                     xxx

Amortization exp                                  xxx

Insurance exp.                                      xxx

Salaries exp                                           xxx

Rent exp                                                  xxx

Interest exp                                           xxx

 

Close Drawing account

Company's Capital                                xxx

 

Drawings                                                 xxx

 

Correcting Entries:

 

Step 1: Reversing the incorrect entry

Step 2: Recording the correct entry

 

Example:

On June 15, company A invoices a customer for $3500 of services performed. On that date, the entry is correctly recorded in the company's book.

Account Receivable                                                    3500

Service Revenue                                                       3500

However, on July14, when payment is received, the accounting clerk incorrectly records the following entry:

Cash                                                                       3500

Service Revenue                                                       3500

In order to correct entry:

Step 1:

Service Revenue                                                         3500

 

     Cash                                                                           3500

Step 2:

Cash                                                                            3500

 

Account Receivable                                               3500

 CHAPTER 5

 

Comparison of entries - Perpetual vs Periodic inventory system

Entries on purchaser's books

 

Transactions

Perpetual inventory system

Periodic inventory system

Purchase of merchandise on credit

Merchandise Inventory     xx

         A/P                                       xx

Purchase                xx

     A/P                             xx

Freight cost on purchase

Merchandise Inventory     xx

          Cash                                     xx

Freight in                xx

       Cash                          xx

Purchase return and allowance

A/P                                    xx

          Merchandise Inventory        xx

A/P                          xx

        Purchase return

         And allowance        xx

Entries on seller's books

 

Transactions

Perpetual inventory system

Periodic inventory system

Sale of merchandise on credit

A/R                                    xx

          Sales                                     xx

COGS                                xx

          Merchandise Inventory        xx

A/R                           xx

          Sales                       xx

No entry

Return of Merchandise sold

Sales return and allowance xx

          A/R                                      xx

Merchandise Inventory     xx

           COGS                                 xx

Sales return and

allowance                 xx

          A/R                          xx

No entry

 

CHAPTER 6

 

Inventory cost flow methods in periodic inventory system:

Date

Explanation

Units

Unit cost

Total Cost

1/1

Beginning Inventory

100

10

1000

4/15

Purchase

200

11

2200

8/24

Purchase

300

12

3600

11/27

Purchase

400

13

5200

total

 

1000

 

12000

Calculate COGS and Ending inventory by using (1) FIFO (2) Average Method (3) LIFO if the company sold 500 units

 

1. FIFO - assumes that earliest goods purchased are the first to be sold

   COGS = 100*10 + 200*11 + 200*12 = 5600

   Ending Inventory = 100*12+400*13 = 6400

2. Average Method- assumes that goods available for sale are identical

   12000/1000 = 12

   COGS = 12*500 = 6000

   Ending Inventory = 500*12 = 6000

3. LIFO- assumes that latest goods purchased are the first to be sold

   COGS = 400*13 + 100*12 = 6400

   Ending Inventory = 100*10+200*11+200*12 = 5600

 

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