121 Notes On Certain Topics

1. 121 Notes On Certain Topics 124 & 122 – Accounting Is Fun!

2. Review Topics • A = L + OE and DR = CR • Matching Principle • Accrual Accounting • Historical Cost Principle • Adjustments – Depreciation • Contra Accounts • Reversing Entries • Transpositions and Slides

3. Present The Fundamental Accounting Equation With The T Account Form, And Label The Debit And Credit Sides As Well As The Plus And Minus Sides • We switch the plus and minus signs around on the other side of the equals sign so that we will be able to carry out double-entry accounting • Whenever there is a minus in front of the account, we must “switch the plus & minus around”

4. The critical rule to remember is that the amount placed on the debit side of one or more accounts MUST equal that amount placed on the credit side of another account or accounts. Debits Must Always Equal CreditsDR = CR

5. Matching Principle The principle that the revenue for one time period is matched up or compared with the related expenses for the same time period • To get an more accurate net income number (and resultant balance sheet accounts), we always want to match all the expenses of one period to the all the revenues of that same period

6. Accrual Accounting • Accrual • Recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded • Expense meaning of accrual: • Record (recognize) an expense when it has been incurred but not yet recorded in the books • Regardless of when the cash is paid • Revenue meaning of accrual: • Record (recognize) a revenue when it has been earned but not yet recorded in the books • Regardless of when the cash is received • Accrued earnings are a better financial measurement for the economic activity for the accounting period Define incur: To come in existence; To bring upon oneself

7. Historical Cost Principle • The principle that a purchased asset should be recorded at its actual, or historical, cost • Historical cost: • Actual cost • What you paid for it • The amount that was on the receipt • Remember: this is different from “market value” • We will see that the historical cost principle is the reason we will create a new account for depreciation expense

8. Adjustments - Depreciation • Originally we bought equipment for $49,720 • We paid the cash or incurred debt for it, so why can’t we just record it as an expense? • Because the income statement would show expenses that are too large • Because the equipment will probably be around for many more years! • The Equipment will probably help to generate revenue for many more years to come • As a result, we must chop the original cost up into pieces and spread the pieces out over the useful life of the asset • This is called depreciation

9. Straight-line Depreciation • A means of calculating depreciation in which the cost of an asset, less any trade-in value, is allocated evenly over the useful life of the asset • (Cost - Trade-in Value)/(Useful Life in Years)

10. Adjustment for Depreciation of Equipment • We have calculated the depreciation expense • Expenses are debits • But what is the credit entry? • Equipment? • No: The historical cost principle says that we must keep the original cost on the books! • We cannot credit the Equipment account • We credit the contra account: Accumulated Depreciation

11. Definitions: Contra Account • Contra Account • An account that is contrary to, or a deduction from, another account; for example, Accumulated Depreciation is listed as a deduction from Equipment • Contra Account Two Rules: • Contra accounts are always “attached” to another account • Contra accounts are always a subtraction from the account it is attached to

12. Accumulated Depreciation • Accumulated depreciation is a contra asset account • It is “connected” to the related asset account • The debit still means left • The credit still means right • But the plus and minus signs are reversed • Because it is subtracted from the related asset account! • When depreciation is recorded, we do not directly subtract (credit) the related asset, such as equipment • The amount of depreciation should be recorded in the account: accumulated depreciation

13. Accumulated Depreciation

14. Book Value or Carrying Value • The cost of an asset minus the accumulated depreciation • Listed on the balance sheet

15. Reversing Entries • The reverse of certain adjusting entries, recorded as of the first day of the following fiscal period • Make it easier for the accountant next period • Next period the accountant does not need to worry about compound entries for payables and receivables where the cash is paid or is received • The use of reversing entries is optional

16. Determine Which Adjusting Entries Can Be Reversed • Must be first day of the period after you made adjusting entries • Look at all adjusting entries and find entries that meet all three qualifications: • An asset or liability was increased • The asset or liability did not have a previous balance • Entry does not involve merchandise inventory or contra accounts • Reverse it by making a new journal entry with the reverse debits and credits • When you post, don’t forget to write “reversing” in item column in the ledger accounts • Example

17. Adjusting Entries

18. Journalize the Reversing Entries

19. Posting Reversing Entries to Wages Payable Account

20. Posting Reversing Entries to Wages Expense Account Notice that posting of $2,000 wages expense results in an $800 balance.

21. Transpositions and Slides ErrorsFinding an error from Trial Balance difference (DR ≠ CR: DR – CR) • Transposition error • Digits have been transposed (switched around) • Slide error • The decimal point in an amount has been misplaced • “Slide the decimal place”

22. Transpositions and Slides • Finding an error from Trial Balance difference (DR ≠ CR: DR – CR) • Divide the difference between two trial balance totals by 2. See if the result matches a transaction amount. • Errors divisible by 9: If an error exists and the amount of difference between the totals of the trial balance is evenly divisible by 9, the error consists of either a transposition or a slide or both.