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Accounting and Finance Essentials. Presented by Bill Moylan. Adjusting Entries. Adjusting Entries. We want to match expenses with revenues earned from those expenses (as closely as possible). Remember the “Accrual Concept”?. The Accrual Concept.
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Accounting and Finance Essentials Presented by Bill Moylan
Adjusting Entries • We want to match expenses with revenues earned from those expenses (as closely as possible). • Remember the “Accrual Concept”?
The Accrual Concept • Revenues are recognized when they are earned, and expenses needed to earn the revenues must be matched with them. • This is different than “cash” accounting.
Common Adjusting Entries • Depreciation • Prepaid Expenses • Accrued Liabilities
Depreciation • Expensing a major asset over a number of years (“useful life”) • Cars, Trucks, Office Equipment (3-5 years) • Land improvements (15 years) • Buildings (varies, but often 20-30 years) • Land ???
Prepaid Expenses • Things you have paid for in advance but have not had the use of • Rent • Lawyer Retainer • Consulting contract
Accrued Liabilities • You have received benefit, but you haven’t paid for it yet
Depreciation • Let’s say we buy a piece of equipment with a 4-year useful life for $40,000 • How much do we expense each year? • $10,000
Depreciation • Straight-line depreciation (SL) • Double Declining Balance (DDB) • Sum of the Years Digits (SOYD)
Straight-line • Divide by # of years; all depreciation expenses are equal • 4 year useful life: 25% per year • $40,000 x 25% = $10,000/year • Simple “depreciation schedule”
DDB Depreciation • DOUBLE the straight-line amount • Use that on the Net Asset Value • 25% x 2 = 50% • $40,000 x 50% = $20,000 (in year one) • N.A.V. = $20,000 • $20,000 x 50% = $10,000 (in year two) • A little more complicated “depreciation schedule”
SOYD Depreciation • Start with useful life • Use years remaining, divided by the total sum of the years’ digits
SOYD Depreciation • Start with useful life • Use years remaining, divided by the total sum of the years’ digits
Which Would We Prefer? • Let’s go to the spreadsheets