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334 Cards in this Set

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Assets
Economic resources that the business plans to use in the future to make money.
Balance sheet
The financial report that shows business assets, liabilities, and owner's equity as of a particular day.
Balanced books
When "where did it go?" equals "Where did it come from?" or when a company's assets equal its liabilities plus owner's equity.
Capital
Assets that help a business or a person make money.
Capitalized
When money is changed into another asset that helps the business make money.
Current assets
Assets that can be used to pay current liabilities.
Current liabilities
Debts that must be paid within one year or one operating cycle, whichever is longer.
Financial accounting
The skill of producing financial statements from business transactions.
Fiscal year
The 12-month period a business uses to report the results of its operations.
Heading
All financial statements have a standard 3-line heading as follows:

Name of the Company
Name of the report
Date (balance sheet) or Period of Time (all other statements)
Liabilities
Debts owed to people outside the company.
Liquid
The easier it is to change an asset into cash, the more liquid that asset is.
Operating cycle
The natural period of time before certain business activities tend to repeat - normally one year.
Owner's equity
That portion of the business the owner gets to keep after paying off all creditors.
Sole proprietor
The individual owner (without partners) of an unincorporated business.
Basic accounting equation
Assets = Liabilities + Owner's equity
or: Owner's equity = Assets - Liabilities
or: Liabilities = Assets - Owner's equity
Business entity (principle)
The financial statements report about a single business. Every business gets its own set of books. Accountants do not mix in the owner's personal financial information.
Current (principle)
"Current" liabilities are those debts that must be paid within one year or one operating cycle, whichever is longer.
Current ratio
Current assets / Current liabilities = Current ratio
Debt ratio
Total liabilities / Total assets = Debt ratio

Or: 100% - Equity ratio = Debt ratio
Double entry accounting (principle)
Recording business transactions twice: once to show where the money came from, and another time to show where the money went.
Equity ratio
Total equity / Total assets - Equity ratio

Or: 100% - Debt ratio = Equity ratio
Account
A place on the financial books to keep track of financial information that the owner wants to know.
Accumulated depreciation
The contra-asset account that accumulates all the depreciation of long-lived assets over the year.
Chart of accounts
The official list of all business accounts.
Contra account
An account that gets subtracted from its related account. Contra accounts always get reported as negative numbers.
Contra-asset account
An account that gets subtracted from an asset account.
Cost of goods sold
The cost to the business of of the goods that it sells.
Depreciation expense
The amount of long-lived assets used up during operations.
Expensed
Money is "expensed" if it is gone forever - if there remains no useful asset as a result of the spending. The opposite of capitalized.
Expenses
Accounts that explain why assets went down from operations.
Income
Accounts that explain why assets went up from operations.
Income statement
The financial report that shows the result of business operations over a period of time.
Inventory
A supply of items a business has on hand.
Net
A word that means a subtraction has occurred.
Net income
Income - Expenses = Net Income.
Netted
When numbers are "netted," they combine so that the negative numbers get subtracted from the positive numbers.
Percentage analysis
A financial statement analysis technique in which one number is assigned as 100% and all other numbers are expressed as a percentage of the first number. In balance sheets, the key number is total assets. In income statement, the key number is sales.
Sales
An income account that explains the increase in business assets as a result of selling goods.
Statement of owner's equity
A financial statement that calculates an end-of-period balance of the owner's equity account.
T-account
A tool to keep track of the ups and downs in accounts. The ups go on one side of the T and the downs on the other side.
Transportation expense
The cost of business airplane fares, trains, and long-distance buses.
Withdrawal
Money that the owner takes from the business, or money in the business account that the owner spends on personal bills.
Book value of a long-lived asset (formula)
Purchase price - Accumulated depreciation = book value
Ending owner's equity formula
Beginning equity + Net Income - Withdrawal = Ending equity
Gross profit (formula)
Sales - Cost of goods sold = Gross profit
Income statement formula
Sales - Cost of goods sold = Gross profit
Gross profit - expenses = Net income
What does the balance sheet include?
Assets, Liability, and equity accounts
What does the income statement include?
Income and expense accounts.
What is the statement of cash flow?
The change over the period in all the accounts.
Cash flow statement
The business financial statement that shows where the cash come from and where it went during the period.
What are the four major sections in the Cash flow statement
1. Cash flow from operations
2. Cash flow from investing activities
3. Cash flow from financing activities
4. A calculation of (1) net cash flow, and (2) cash - end of period
Direct method
The method of calculating cash flow from operations that does not start with net income, but does show cash0in and cash-out categories.
Financing
The process of finding money for the business from sources other than normal operations.
Indirect method
The usual method of computing cash flow from operations. It starts with net income and uses the changes in the asset and liability accounts to adjust net income into cash flow from operations.
Investments
Uses of money to buy assets that make more money. Long-term investment are in assets such as buildings and equipment. Short-term investments are in assets such as certificates of deposit or stock.
Operations
What a business normally does to make money.
Cash flow statement formula
Cash from operations
+ Cash from investing activities
+ Cash from financing activities
= Total change in cash
+ Cash---beginning of period
+ Cash---end of period
Audit
The check of business accounting records in order to give an opinion on whether the financial statements present the business fairly.
Auditors
Certified public accountants who audit accounting records.
Certified public accountants (CPAs)
Accountants licensed by the state as professional independent verifiers of business financial statements.
Financial accounting
The skill of producing financial statements from business transactions.
Financial Accounting Standards Board (FASB)
The organization of accountants that has the responsibility of creating accounting rules.
Generally accepted accounting principles (GAAP)
The rules of accounting that everyone must follow.
Managerial accounting
The skill of providing financial information to run a large business.
Conservative Principle
The accounting principle that requires accountants to resolve financial statement uncertainty in the least favorable way.
Going-Concern Principle
The accounting principle that requires that financial statement be based on the assumption that eh business will last indefinitely.
Historical Cost Principle
The accounting principle that requires assets to be reported on balance sheets at their historical cost.
Objectivity principle
The accounting principle that requires business transactions to be recorded using the best objective evidence.
Stable Monetary Unit Principle
The accounting principle that assumes that the value of money stays the same year after year.
Closing
End-of-year posting to bring the temporary accounts to zero and transfer their balances into the owner's equity account.
Contra accounts
Sister accounts that have a normal balance the opposite of their brother account. Contra accounts are reported under their brother account and have the effect of lowering the brother account.
Credit
The right side of T-accounts. Credits increase liabilities and equity and income accounts, but decrease assets.
Debit
The left side of T-accounts. Debits increase assets, withdrawal and expense accounts, but decrease liabilities and equity.
Income summary
An account used once a year for closing entries. Its purpose is to record net income for the year.
Interim financial statements
Financial reports for any period less than one year.
Normal balance
All accounts normally keep balances that are either debits or credits.
Post-closing trial balance
A trial balance prepared after the books have been closed at the end of the year.
Posting
The process of taking amounts from recorded business transactions and placing those amounts as debits or credits in the various accounts.
Temporary accounts
Accounts that get closed (brought to zero) at the end of each year. The temporary accounts are income, expenses, withdrawal, and dividends.
Trial balance
A listing of all accounts with their balances. Debit balances go in the debit column; credit balances go in the credit column. The debit column must equal the credit column for the books to be in balance.
Debit and credit formula
Debits = Credits

Always.
What five things does every journal entry have?
1. An identifying number or letter
2. The date of the entry
3. A debit entry with the number in the debit column
4. An indented credit entry with the number in the credit column
5. An explanation commonly placed inside parentheses or underlined
General journal
The book or computer subroutine that can be used to record any type of accounting entry.
General ledger
The book or computer subroutine that contains all the individual accounts.
Specialized journal
A book or computer subrouting that is designed for quick input of a frequent type of business transaction.
Vertical journal entries
A method of journalizing and posting accounts at the same time by recording transactions vertically in columns.
What is the journal entry to record: Owner contributes $100 to the business
Cash 100
. Owner's equity 100
What is the journal entry to record: Buy a $7,000 machine with cash
Machines 7,000
Cash 7,000
What is the journal entry to record: Buy a $2,000 car on time with a $100 cash down payment
Car 2,000
Cash 100
Loans payable 1,900
What is the journal entry to record: Borrow $1,000
Cash 1,000
Loans payable 1,000
What is the journal entry to record: Earn $4,000 of cash income from sales
Cash 4,000
Sales 4,000
What is the journal entry to record: Owner contributes $100 to the business
Cash 100

Owner's equity (100)
What is the journal entry to record: Buy a $7,000 machine with cash
Machines 7,000

Cash (7,000)
What is the journal entry to record: Buy a $2,000 car on time with a $100 cash down payment
Car 2,000

Cash (100)
Loans payable (1,900)
What is the journal entry to record: Borrow $1,000
Cash 1,000

Loans payable (1,000)
What is the journal entry to record: Earn $4,000 of cash income from sales
Cash 4,000

Sales (4,000)
What is the journal entry to record: Pay loan payment of $535 of which $35 is interest
Loasns payable 500
Interest expense 35

Cash (535)
What is the journal entry to record: Owner buys $150 of perosnal groceries
Withdrawal 150

Cash (150)
What is the journal entry to record: Adjust balloon inventory to make it $500 bigger
Balloon inventory 500

Balloon expense (500)
What is the journal entry to record: Adjust balloon inventory to make it $500 smaller
Balloon expense 500

Balloon inventory (500)
What is the journal entry to record: Record $1,500 of car depreciation
Depreciation expense 1,500

Accumulated depreciation---car (1,500)
What is the journal entry to record: Correct $50 wrongly debited to car expense instead of travel expense
Travel expense 50

Car expense (50)
What is the journal entry to record: Close out $10,000 of income and $6,000 of expense accounts
Income accounts 10,000

Expense accounts (6,000)
Income summary (4,000)
What is the journal entry to record: Correct $50 wrongly debited to car expense instead of travel expense
Travel expense 50

Car expense (50)
What is the journal entry to record: Close out $10,000 of income and $6,000 of expense accounts
Income accounts 10,000

Expense accounts (6,000)
Income summary (4,000)
AICPA
American Institute of Certified Public Accountants. Accounting's professional organization that issues the code of ethics for accountants.
Bonded
An employee is bonded when an insurance company has issued a policy saying it will pay the employer should the employee ever steal.
Ethics
Standards that define how to act in business situations.
Internal controls
Business procedures that make it difficult to get away with wrong behavior.
Material
Information significant enough to affect decision making.
Materiality Principle
The accounting principle that says that businesses should pay for more accurate information only if the information is useful for making business decisions.
Clear the bank
A check has cleared the bank if the payee has presented the check to the bank and the bank has paid it by taking money out of the maker's account.
Deposit not shown
A deposit not shown is a bank deposit made too late to show up on the bank statement.
Maker
The person who writes a check.
Marketable securities
Securities (pieces of paper that represent ownership in investment such as stocks, bonds, etc.) that are traded on public exchanges, such as the New York Stock Exchange.
Miscellaneous expense
An expense account for small expenses that are not important enough to have their own account.
Non-operating
Non-operating expenses or revenues come from transactions that are not part of normal business operations.
Outstanding
A check is outstanding when it has not yet cleared the bank.
Payee
The person to whom a check is written.
Petty cash system
A system for making small payments with cash.
Realized gain/loss
A gain or loss that happens when an asset is sold.
Short-term investments
Investments that the business plans to resell within one year.

Also called investments in marketable securities.
Trading investments
Short-term investment for which the purpose is to resell them for a profit.
Unrealized gain/loss
A gain or loss as a result of a business asset going up or down in value, but the asset has not been sold.
Bank reconciliation formula #1
Balance per bank
+ Deposits not shown
- Outstanding checks
+ or - bank errors.
= Adjusted bank balance
Bank reconciliation formula #2
Balance per cash account
+ Interest income
- Bank fees
+ or - business errors
= Adjusted book balance
What is the journal entry to record: Bank reconciliation
Cash (adjusted either up or down) xxx (xxx)
bank fee xx

Interest income (xx)
What is the journal entry to record: Set up a $100 petty cash fund
Petty cash 100
Cash (100)
What is the journal entry to record: Buy $1,000 of short-term investments
Short-term investment 1,000
Cash (1,000)
What is the journal entry to record: Receive a $100 dividend on stock
Cash 100
Dividend revenue (100)
What is the journal entry to record: Reflect that short-term investments have gone up $300
Short-term investments 300
Unrealized gain in ST investments (300)
What is the journal entry to record: Sell for $900 stock that was bought for $1,000
Cash 900
Realized loss on sale of stock 100

Short-term investment (1,000)
Accrual basis accounting
The system in which income is recognized when earned and expenses are recognized when incurred.
Cash basis accounting
The system in which income and expenses are recognized when cash changes hands. Cash basis accounting does not meet GAAP.
Control account
The account that shows the total of all the individual records in the subsidiary record.
Current assets
Assets that are available to spend within a year.
Direct write-off method
The method that recognizes bad-debt expenses in the period the business writes off the accounts receivable. Not GAAP.
Fixed assets
Assets that are expected to last longer than one year. Also called plant assets.
On account
A sale for which payment is to be made later.
Plant assets
The same as fixed assets.
Subsidiary record
A separate record containing the details of a control account. Example: the accounts receivable subsidiary record lists all who owe the company money, the total of which is reflected in accounts receivable.
Write-off
When a company gives up collecting an account receivable, it writes off the account by removing it from company records.
Matching Principle
The company's income and expenses associated with that income should be matched with each other and reported in the same period.
Percentage of accounts receivable method
The method of estimating the allowance for uncollectible accounts.

A/R x Est% = What allowance should be
- What allowance is
= Adjustment
Percentage of sales method
The method of estimating uncollectible accounts expense.

Sales x Est% = Uncollectible accounts expense
What is the journal entry to record: Record $100 of sales on account
Accounts receivable 100
Sales revenue (100)
What is the journal entry to record: Record $100 collected on account
Cash 100
Accounts receivable (100)
What is the journal entry to record: Adjust allowance to be $1,000 when it is $800
Uncollectible accounts expense 200

Allowance for uncollectible accounts (200)
What is the journal entry to record: Record uncollectible accts exp estimated at 2% of $100,000 sales
Uncollectible accounts expense 2,000

Allowance for uncollectible accounts (2,000)
What is the journal entry to record: Write off $1,000 bad debt (allowance method)
Allowance for uncollectible accounts 1,000
Accounts receivable (1,000)
What is the journal entry to record: Write off $1,000 bad debt (direct write-off method)
Bad debt expense 1,000
Accounts receivable (1,000)
Discount a note
To sell a note to a bank that subtacts a discount, giving the seller the proceeds.
Face amount
The dollar amount written on the face of a note.
Face interest
The interest rate written on the face of a note.
Future value of a note
The amount borrowed plus the interest up to the maturity date.
Interest-bearing note
A note with an interest rate written on the face, whose face amount is the present value.
Maker
The person who borrows money and writes a note promising to pay in the future.
Maturity value
The future value of a note.
Non-interest-bearing note
A not without an interest rate written on the face, whose face amount is the future value.
Present value of a note
The amount borrowed, or the principal. Interest-bearing notes show the present value as the face amount.
Principal
The loan amount a bank gives in exchange for a note.
Maker
The person who borrows money and writes a note promising to pay in the future.
Maturity value
The future value of a note.
Non-interest-bearing note
A not without an interest rate written on the face, whose face amount is the future value.
Present value of a note
The amount borrowed, or the principal. Interest-bearing notes show the present value as the face amount.
Principal
The loan amount a bank gives in exchange for a note.
Proceeds of a note
The amount a bank gives in exchange for a note.
Quick assets
Assets quickly changeable inot cash: cash, short-term investments, and net accounts receivable.
Acid test ratio formula
The same as quick ration formula:

Total quick assets/Total current liabilities = Quick ratio
Average net accounts receivable (A/R) formula
(beginning net A/R + Ending net A/R)
/ 2
= Average net A/R
Days' sales in A/R formula
Average net A/R
/ One day's sales
= Days' sales in A/R
Discount on a note
Future value of the note
x Discount%
x Years ( or fraction thereof)
= Discount
Interest formula
Loan amount (or principal)
x Rate%
x Years ( or fraction thereof)
= Interest
One day's sales formula
Net sales on account
/ 365 days
= One day's sales
Present Value principle
Financial assets are shown on the balance sheet at their present value. When given a non-interest-bearing note (which has interest in the face amount), GAAP requires that the interest be backed out.
Proceeds from a discounted note formula.
Future value - Discount = Proceeds
Quick ratio formula
Total quick assets
/ Total current liabilities
= Quick ratio
What is the journal entry to record: Accept a $1,000 note in payment for goods
Note receivable 1,00
Sales revenue (1,000)
What is the journal entry to record: Discount a $1,000 note at the bank for $1,070
Cash 1,070
Note receivable (1,000)
Interest revenue (70)
What is the journal entry to record: Accrue $400 of interest on a note
Interest receivable 400
Interest revenue (400)
What is the journal entry to record: Receive $1,100 payment on a $1,000 note. $60 of interest receivable was already accrued.
Cash 1,100
Note receivable (1,000)
Interest receivalbe (60)
Interest revenue (40)
What is the journal entry to record: Record customer default on $1,000 not held to maturity. $100 of interest has been accrued.
Accounts receivable 1,100
Interest receivable (100)
Note receivable (1,000)
What is the journal entry to record: Employer loans $100 to employee
Loan receivable 100
Cash (100)
Contra-purchases account
An account that is subtracted form Purchases to compute Net Purchases. Examples: Purchases Discount and Purchases Returns and Allowances.
Cost of goods sold
The cost paid for the merchandise sold.
FIFO
First-in, first-out. The inventory system that assumes the oldest items in inventory are the first ones sold.
Gross margin
See gross profit formula

Sales - Cost of goods sold = Gross profit, or gross margin
LIFO
Last-in, first-out. The inventory system that assumes the latest items purchased are the first ones sold.
Periodic inventory method
The inventory method that keeps track of merchandise costs in various purchases and contra-purchases accounts and then computes cost of goods sold on the income statemnt. Inventory on the books is adjusted only at year-end.
Perpetual inventory method
The inventory method that increases the inventory account with every purchase and lowers the inventory account with every sale.
Purchases account
A cost of goods sold account used in the periodic inventory method to keep track of all merchandise bought for resale during the year.
Purchases discount account
A contra-purchases account used under the periodic inventory method to keep track of discounts granted by vendors for paying early.
Purchases returns and allowances
A contra-purchases account used under the periodic inventory method to keep track of refunds a business gets for returning merchandise to vendors, or reductions in price (allowances) the vendors offer to resolve complaints.
Specific unit
The inventory system that keeps track of the actual historic cost of each inventory item. When that item is sold, the cost flows into cost of goods sold.
Weigted average
The inventory sytem that averages the cost of all items in inventory and assigns that averaged cost to the items sold.
Average inventory
(Beginning inventory + Ending inventory)
/ 2
= Average inventory
Consistency Principle
Businesses should use the same accounting system from period to period. For example, there is no switching back and forth from LIFO to FIFO.
Cost of goods sold formula
Beginning inventory
+ Net purchases
= Goods available for Sale (GAS)
- Ending inventory
= Cost of goods sold
Cost of goods sold percent (CGS%)
Cost of goods sold / Total sales = CGS%

or:

100% - Gross profit percent (GP%) = CGS%
Days in inventory formula
Measures the average number of days before merchandise sells.

365 / Inventory tunover = Days in inventory
Disclosure Principle
Financial statements should disclose enough information to allow outside readers to make intelligent diceisions. The information should be relevant, reliable, and comparable. For example, financial statements must disclose the inventory system used.
Gross profit formula
Sales - Cost of goods sold = Gross profit, or gross margin
Gross profit percent (GP%) formula
Gross profit / Total sales = GP%
Inventory turnover formula
Measures the number of times inventory completely sells per year.

Cost of goods sold / Average inventory = Inventory turnover
Lower of Cost or Market (LCM) Principle
The company must report inventories at cost or the current market price, whichever is lower.
Net purchases formula
Purchases - Purchase discounts - Purchase returns and allowances + Freight-in = Net purchases
What is the journal entry to record: Buy merchandise for resale, perpetual method
Inventory 100
Cash (100)
What is the journal entry to record: Buy merchandise for resale, periodic method
Purchases 100
Cash (100)
What is the journal entry to record: Sell item for $500 that cost $300, perpetual inventory system
Cash 500
Sales (500)
Cost of goods sold 300
Inventory (300)
What is the journal entry to record: Return $50 of purchases for a refund
Cash 50
Purchases returns and allowances (50)
What is the journal entry to record: Sell item for $500 that cost $300, periodic inventory system
Cash 500
Sales (500)
(Do not adjust inventory under the periodic system.)
What is the journal entry to record: Pay $98 to buy $100 of merchandise. Vendor discounted $2 for paying quickly.
Purchases 100
Cash (98)
Purchases discount (2)
What is the journal entry to record: Adjsut a periodic inventory at year end. Inventory account is $1,000, but should be $1,075
Inventory 75
Purchases (75)
Consumption method for supplies
The method of accounting for operating supplies that recognizes supplies as an expense when they are consumed. When supplies are purchased, the debits are stored in supplies inventory. The supplies expense account is not touched until the inventory account is adjusted.
Prepaids
Assets that represent expenses paid in advance that provide future benefits to the business.
Purchase method for supplies
The method of accounting for operating supplies that recognizes supplies as an expense when they are purchased. Whens upplies are purchased, the debits are stored in supplies expense.; The supplies inventory is not touched until the end of the year.
What is the journal entry to record: Buy 3 years insurance for $3,600
Prepaid Insurance 3,600
Cash (3,600)
What is the journal entry to record: Use up $100 supplies, purchases method
Supplies Expense 100
Cash (100)
What is the journal entry to record: Purchase $100 supplies, consumption method
Supplies Inventory 100
Cash (100)
What is the journal entry to record: Adjust supplies inventory at end of year
Supplies Inventory (whatever is necessary to correct inventory account) xxx . (xxx)

Supplies expense xxx . (xxx)
Liability account
Payable or Deferred
Equity account
Owner's name, Withdrawal, Dividend, Stock
Income Account
Sales, Income or Revenue
Expense account
Expense (Every expense account on the CLEP exam should have "exp." at the end. such as "rent exp.")
Asset account
Receivable, prepaid, Investment, Inventory

Many asset accounts merely list the name of the asset, such as "land" and "equipment" without any special identifying word. Whenever CLEP questions list an account without one of these key words, you should assume that it is an asset account.
Sarbanes-Oxley Act (SOX)

(Ethics)
When someone in a corporation commits a crime, SOX says corporate managers may be criminally responsible if they do not have an enforced ethical policy in place. Companies must have a system of internal controls that auditors must test and evaluate.
Code of ethics

(Ethics)
The American Institute of Certified Public Accountants (AICPA), accounting's professional organization, has issued a code of ethics for accountants. Your company needs a code of ethics that spells out what to do in certain circumstances.
Law

(Ethics)
Nothing unlawful is ethical. Not everything lawful is necessarily ethical, however.
Full disclosure

(Ethics)
Do not hide from users of financial statements anything that makes your business look worse. When accounting rules require you not to put something on the balance sheet (the results of an uncertain pending lawsuit, for example), attach a note to your financial statements explaining the uncertainty. Accounting information is not complete without notes that disclose what the financial statements do not.
Conflicts of interest

(Ethics)
Reveal to all readers of financial statements any conflict of interest the owners have. For example, the $5 million building on the balance sheet that the corporation bought from the major stockholder was appraised at $1 million.
Reveal important contracts

(Ethics)
A corporation is not worth $10 million if the CEO has a golden parachute contract giving her $5 million should she be fired.
Plant assets ( or capital assets or fixed assets)
Plant assets ( or capital assets or fixed assets) are assets that have a life longer than one year.
Expensed
Recorded the cost as an expense.
Capitalized
Recorded the cost as an asset.
All-Costs-to-Get-Operating-Principle
Requires a business to capitalize all cost necessary to get an asset operating.
Allocate a purchase price among assets

(pg. 187 REA)
Page 187 in Financial Accounting REA (memorize)
Book value of a fixed asset
Historical cost of an asset
- Asset's accumulated depreciation
= Asset's book value
Cash received on sale of asset
Book value + Gain (or - Loss) = Cash Received
Gain or Loss calculation
Amount received - Book value (BV) given up = Gain or ( - Loss)
New Life Principle
If any work on an asset extends the life of that asset, the cost of that work should be capitalized.
What is the journal entry to record: Purchase fixed asset
Building or equipment or land xxx
Cash (xxx)
What is the journal entry to record: Spend $50 on repairs and $1,000 to extend life of Machine A, with $600 in accumulated depr.
Repair Expense 50
Accumulated depreciation 600
Machines 400
Cash (1,050)
What is the journal entry to record: Spend $700 to make new equipment operational
Equipment 700
Cash (700)
What is the journal entry to record: Sell a $1,000 machine with $300 A/D for $500
Cash 500
Accumulated depreciation 300
Loss on sale of machine 200
Machine (1,000)
What is the journal entry to record: Sell a $1,000 machine with $300 A/D for $800
Cash 800
Accumulated depreciation 300
Machine (1,000)
Gain on sale of machine (100)
Accelerated depreciation method
A depreciation method that results in higher depreciation expense in an asset's early years.
Depreciable cost
The amount of the historical cost of an asset that gets allocated over the useful life of the asset.
Depreciated out

Fully depreciated
An asset is said to be fully depreciated when its book value equals its salvage value.
Depreciation convention
Conventions are assumptions about the purchase dates of fixed assets in order to simplify the depreciation process
Depreciation convention

- Beginning of year
Assume all assets purchased during the year were purchased on the first day of the year.
Depreciation convention

- Nearest month
Assume all assets purchased within the first 15 days of the month are purchased on the first day of the month. Assume all assets purchased after the 15th of the month are purchased on the first day of the following month.
Depreciation convention

-Nearest year
Assume all assets purchased within the first 6 months of the fiscal year are purchased on the first day of the year. Assume all assets purchased within the last 6 months of the fiscal year are purchased on the first day of the following year.
Depreciation convention

- Mid year
Assume all assets are purchased on the first day of the 7th month of the fiscal year.
Depreciation convention

- Mid month
Assume all assets are purchased on the 15th of the month.
Depreciation schedule
A list of all fixed assets in the company, their purchase dates, their depreciation methods, and their depreciation each year.
MACRS
Modified Accelerated Cost Recovery System, for which IRS tables tell the rate by which to multiply an asset's historical cost.
Salvage value

Residual value

Scrap value
The estimated amount received for an asset at the end of its useful life. Also called residual value and scrap value.
Change-in-Accounting-Estimates Principle
Allows businesses to change estimates when more accurate information becomes available. Changes are made for the current and all future years, but not retroactively.
Consistency Principle
Forbids businesses to change accounting methods from year to year.
Double declining balance depreciation
Book value at beginning of year x 2
/ Estimated life
= Depreciation expense for year until book value reaches salvage value
MACRS depreciation
Historical cost x IRS decimal = Depreciation for year.

Salvage value = $0
Straight-line depreciation
(Historical cost - Salvage value) x Units this year
/ Total estimated units (hours or miles)
= This year's depreciation
What is the journal entry to record: Depreciate $3,000 on buildings and $1,000 on equipment
Depreciation expense 4,000
Accumulated depreciation--building (3,000)
Accumulated depreciation--equipment (1,000)
Amortization expense
The amount of an intangible asset used up during the period.
Depletion expense
The amount of a natural resource used up during the period.
Fully amortized
When an intangible asset is fully amortized, all of its cost will have been allocated to past fiscal periods, and its book value will be zero.
Intangible assets
Assets with no physical form, yet they offer value to a business for more than one year. Common types are:
-Patents. The exclusive right to produce and sell an invention
-Copyrights. The exclusive right to publish, perform, or reproduce music, art, film, books or software.
-Trademarks and trade names. Special identification that are protected against infringement.
-Goodwill. The extra cost a business pays for another business for being unusually profitable.
-Franchises and licenses. Contracts or government grants that give the owner special rights.
Research and Development
The cost a company pays to create and develop a product. It is never an intangible asset, but instead is expensed each year.
What is the journal entry to record: Develop a patent
Patent (design and legal) xx,xxx
Cash (xx,xxx)
What is the journal entry to record: Put in a $4,000 driveway and $3,000 fence
Land improvements 7,000
Cash (7,000)
What is the journal entry to record: Spend $50,000 on research and development of a new drug
Research and development expense 50,000
Cash (50,000)
What is the journal entry to record: Amortize a patent $500
Amortization expense 500
Patent (500)
Deplete mineral rights $10,000
Depletion expense 10,000
Accumulated depletion (10,000)
What is the journal entry to record: Report that a franchise with an indefinite life has gone up in value
(No journal entry. Do not increase the book value of intangible assets when they go up in value.)
What is the journal entry to record: Report that a franchise with an indefinite life has gone down in value
Loss of franchise xx,xxx
Franchise (an intangible asset) (xx,xxx)
Accrue
Recognize revenues or expenses on accounting books even though no cash changes hands.
Adjusting entry
A non-cash journal entry at the end of a period that adjusts a balance sheet account.
Amortization shcedula
A schedule showing the principal, interest, and remaining balance for each payment on a loan.
Interest payable
The account that reflects interest accrued on business debts.
Principal
The amount borrowed; this is the non-interest portion paid back when making loan payments.
Reversing entries
Entries made on the first day of a new period that switch the debits and credits of the adjusting entries made on the last day of the previous period.
Wages payable
The account that reflects wages earned as of the end of the period but not yet paid.
Warranty
A promise by a business to pay for future expenses of a product sold.
Warranties payable
An account that shows the estimated amount owed on the warranties a business offers.
Current Portion Principle
The accounting principle that requires a reporting of the current and non-current portions of all debt. Where the current portion cannot easily be estimated, this principle requires reporting the entire debt as current.
Loan amortization schedule
A schedule that shows key information about all payments of a loan. (pg. 236 REA)
What is the journal entry to record: Get a $290 invoice for utilities
Utilities expense 290
Accounts payable (290)
What is the journal entry to record: Pay a $290 bill in our accounts payable
Accounts payable 290
Cash (290)
What is the journal entry to record: Company owes $1,000 of wages
Wages expense 1,000
Wages payable (1,000)
What is the journal entry to record: Pay $1,000 of wages accrued last period
Wages payable 1,000
Cash (1,000)
What is the journal entry to record: Estimate cost of warranties: $6,000
Warranties expense 6,000
Warranties payable (6,000)
Pay $3,000 on products covered by warranty
Warranties payable 3,000
Cash (3,000)
What is the journal entry to record: Make a loan payment
Interest expense (decreases each period) xxx
Loan payable (principal portion) xxx
Cash (x,xxx)
What is the journal entry to record: Accrue $500 of interest owed on a loan
Interest expense 500
Interest payable (500)
What is the journal entry to record: Reverse this entry: Interest expense 500,
Interest payable (500)
Interest payable 500
Interest expense (500)
(Reversing entries switch the debits and credits)
CLEP Clue
The CLEP test will try to trick you into thinking that the bond issuance costs should reduce the premium or increase the discount and thus spread over the life of the bod. However, the bond issuance cost is always expensed in the year the bonds are issued.
CLEP Clue
The CLEP exam may refer to the periodic cash payment as an "interest payment." Beware! Remember that this "interest payment" does not represent interest expense.
CLEP Clue
Bonds are one of the most difficult parts of the CLEP accounting exam. To help you understand the workings of discounts and premiums, study Figure 18-4, which shows the impact of periodic payments for both Bond #1 and Bond #2 . You will probably not need to reproduce this schedule on the CLEP exam. (pg. 250 REA)
CLEP clue
The CLEP exam will most likely use the account name "Deferred warranty [or something] revenue." The final word "revenue" in the name confuses test-takers into thinking this is a revenue account. Remember that every account beginning with the word "deferred" is a liability account.
Bonds
Certificates that corporations (and governments) issue to borrow large amounts of money from a large number of people. The certificates call for periodic cash payments each year with a lump sum payment on the maturity date.
Bond book value
The true value of the bond liability.
Deferred credit or deferred revenue
A section of the liability section of the balance sheet. These liabilities result from receiving cash before earning it.
Contra-liability account
A negative liability, such as a bond discount.
Discount
When lenders pay less for a bond than the face amount, the difference between what the lenders pay and the face amount is the discount.
Face (of a bond)
The front side of the bond certificate
Face amount
The amount written on the face of a bond that represents the lump sum payment the borrowing corporation promises to pay on the maturity date.
Face rate
The percentage written on the face of a bond used to calculate the periodic cash payment.
Interest payment dates
The dates (usually semiannual or quarterly) each year on which the borrowing corporation promises to make the periodic cash payments.
Market interest rate
The rate that most lenders can immediately get for their money.
Maturity date
The day the borrowing corporation promises to pay the lump sum payment required by the bond.
Periodic cash payments
The semiannual or quarterly payments a bond requires the borrowing corporation to make.
Premium
The amount that lenders pay for a bond in excess of the face amount.
Underwriter
A company with plenty of cash that buys an entire offering of bonds with the hope of reselling them for a profit.
Bond book value
Face amount of bond + Premium (or - Discount) = Bond book value
Periodic cash payment
Face amt. of bond x Face rate of bond x Fraction of year = Cash payment
Periodic interest expense
Book value of the bond x Market rate x Fraction of year = Interest expense
Quoted price of a bond
Amount investors pay for bond
/ Face amount of bond
= Quoted price stated as a percent, but without the % sign.
What is the journal entry to record: Issue $10,000 of bonds at a price of $110
Cash ($10,000 x 110%) 11,000
Premium on bonds payable (1,000)
Bonds payable (10,000)
What is the journal entry to record: Issue $10,000 of bonds at a price of 90
Cash ($10,000 x 90%) 9,000
Discount on bonds payable 1,000
Bonds payable (10,000)
What is the journal entry to record: Bonds periodic cash payment of $10,000 with an interest expense of $9,000
Interest expense 9,000
Premium on bond payable 1,000
Cash (10,000)
What is the journal entry to record: Bond periodic cash payment of $10,000 with an interest expense of $11,000
Interest expense 11,000
Discount on bond payable (1,000)
Cash (10,000)
What is the journal entry to record: Receive $24,000 in advance for 4 years of rent
Cash 24,000
Deferred rent revenue--current (6,000)
Deferred rent revenue--long-term (18,000)
What is the journal entry to record: earn $10,000 of rent income received in advance
Deferred rent revenue 10,000
Rent revenue (10,000)
Authorized shares
Maximum shares that a corporation may legally issue.
Cash dividend
A share of the profits distributed to stockholders in the form of cash.
Common stock
The type of stock that represents the basic ownership of a corporation.
Corporation
An artificial "person" created by the laws of a state that has the right to do business.
Date of record
Usually a week or two after the declaration date. Whoever owns corporate stock on the date of record gets the dividend.
Declaration date
The date on which the corporate board of directors declares a dividend.
Guaranteed payment
Money partners receive for some reason other than splitting profits by some ratio.
Incorporate
To become a corporation.
Issued shares
The number of shares of a corporation that the corporation has issued to investors.
No-par stock
Corporate shares with no dollar amount written on the stock certificate.