Mastering Accounting Essentials: T-accounts, Depreciation & Financial Statements

1. All you wanted to know about Accounting and More

2. There Are Two Sides to Every Transaction Story • In the world of business, you have to give something to get something. Accountants recognize this, and that’s why every transaction has both a debit side and a credit side.

3. Understanding T-accounts • Debits- Recorded on the Left side of the T-account • Credits- Recorded on the Right side of the T-account ACCOUNT NAME DEBITS CREDITS Example: A manager buys an oven for $8,500 cash. The transaction will be recorded as follows: Cash Equipment 8,500 8,500

4. The Accounting Cycle • Transactions are recorded throughout the month. • Trial balance is prepared. • Necessary adjustments are made. • Information is transferred to the balance sheet and income statement. • Accounts are closed, and a new cycle begins.

5. Cost of Sales Formula Opening Inventory (Food on hand; first day of the period) + Purchases - Closing Inventory (Food on hand, last day of the period) = Cost of Sales (or food cost)

6. DIRECT COSTS Definition: Expenses that are the responsibility of a specific department Examples Include: food purchases, supplies, and wages INDIRECT COSTS Definition: Expenses that are not easily charged to any one specific department; usually distributed according to each department’s percent of total revenue Examples Include: advertising, utilities, administrative costs, building maintenance, and energy costs

7. Straight-line Depreciation Method Distributes the coast of an asset equally over each year of its useful life. (Cost of asset – Trade-in Value) Useful life of asset (in years) Your Turn: A rotating oven with a purchase price of $9,200 will be worth $400 in 4 years. How much will the oven depreciate monthly using the straight-line method?

8. Answer: $183 (rounded)

9. Declining Balance Depreciation Method • The depreciation rate is greater than the straight-line rate, and no trade-in value is used this method will give the business a lower taxable income in the earlier years.

10. Sum-of-the Years Digits Depreciation Method -Depreciation is accelerated by using an asset’s estimated life to determine the rate.

11. Just the Facts • New equipment purchased: cash register system • Initial cost: $14,750 • Estimated Life: 6 Years • Trade-in value in 6 years: $1,250 • Denominator to be used: 21 • Numerators to be used: 6,5,4,3,2, and 1 • Fractions to be used each year: 6/21,5/21,4/21,3/21,2/21,1/21 • Depreciation Year 1:____________ Year 2:____________ Year 3:____________ Year 4:____________ Year 5:____________ Year 6:____________

12. Answers • Year 1: $3,857 • Year 2: $3,214 • Year 3: $2,571 • Year 4: $1,929 • Year 5: $1,286 • Year 6: $ 643

13. Units of Production Depreciation Method Used to determine depreciation values for those assets with specific units of production (Cost – Trade-in value) Estimated units of production over useful life

14. An Income Statement Shows: • How a business is doing in terms of total sales and expenses. • How one period’s sales and expenses compare to those of other periods

15. Costs listed on a Typical Income Statement • Cost of Sales • Controllable expenses -Salaries and wages -Employee benefits -Direct operating expenses -Marketing -Energy and utility services -Administrative and general costs -Repairs and general costs

16. Costs Listed on a Typical Income Statement cont. • Occupancy costs • Interest expense • Depreciation • Overhead • Income taxes

17. A Balance Sheet: • Demonstrates a foodservice establishment’s ability to pay its debts. • Shows what portion of profits have been retained. • Helps investors estimate the level of risk for future investments.

18. Capital Item • Definition- items such as land, buildings, and equipment that have a life expectancy of at least three years. • Examples - Furniture - Fixture - Piece of equipment