‭NOTES 11-13-2023‬

‭ Once the‬‭expenses are‬‭incurred‬‭, that’s the‬‭time that would be recognized‬‭only by the firm, not‬
—
‭during the cash payment.‬
‭●‬ ‭They are not recognized during the period where it was paid.‬
‭— Under a periodic inventory system, the Merchandise Inventory account is‬‭not updated with‬
‭every purchase or sale‬‭. Instead, the Merchandise Inventory‬‭account is typically debited only when‬
‭inventory is purchased, and the cost of goods sold is recorded at the‬‭end of the accounting period‬
‭based on a physical count of the ending inventory.‬
‭●‬ ‭Process under a periodic inventory system:‬
‭1.‬ ‭Purchase of Goods for Resale‬
‭- Debit: Purchases (or Inventory)‬
‭- Credit: Accounts Payable (if purchased on credit) or Cash (if purchased with cash)‬
‭2.‬ ‭End of the accounting period‬
‭- perform a physical count of ending inventory‬
‭3.‬ ‭Recording cost of goods sold‬
‭- calculate the cost of goods sold based on the beginning inventory, net purchases‬
‭during the period, and the ending inventory‬
‭- Debit: Cost of Goods Sold‬
‭- Credit: Merchandise Inventory‬
‭— In a periodic inventory system, the removal of beginning inventory from the books is not done by‬
‭crediting the Income Summary account. The Income Summary account is used to summarize‬
‭revenues and expenses during the closing process at the end of an accounting period.‬
‭●‬ ‭The removal of beginning inventory is part of the calculation of the cost of goods sold‬
‭when preparing financial statements.‬
‭●‬ ‭The adjustment is made to recognize the cost of goods sold and determine the‬
‭ending inventory‬
‭— Under the accrual basis of accounting, only income that has been earned is included in the‬
‭revenue total on the income statement.‬
‭— The objective of matching revenues and expenses to specific fiscal periods is most nearly‬
‭attained when revenues and expenses are recognized in the period during which they are earned or‬
‭incurred, regardless of when cash related to the transactions is received or paid.‬
‭— Journal entry to record interest that has been earned but not yet received:‬
‭- Debit: Interest Receivable‬
‭- Credit: Interest Income‬
‭— Merchandise Inventory is the quantity of goods that a business has on hand for sale to customers‬
‭— Under a periodic inventory system, the adjustment for merchandise inventory is made in‬‭two‬
‭steps‬
‭— Under a periodic inventory system, the beginning merchandise inventory is removed from the‬
‭books with a journal entry that includes a‬‭debit to‬‭income summary‬
‭— Ending merchandise inventory includes a credit to income summary. (Under the periodic inventory‬
‭system)‬
‭—‬‭Accrual basis of accounting‬‭is the procedure that‬‭most nearly attains the objective of matching‬
‭revenues and expenses to specific accounting periods‬
‭— Adjusting entry to record‬‭accrued interest on a‬‭note payable‬‭= debit to Interest Expense and‬
‭credit to Interest Payable‬
‭ ‬‭Accrued expenses‬‭are used in one period but not paid for until a later period‬
—
‭— An adjusting entry is usually‬‭not‬‭required for revenue that is earned, recorded, and paid for by the‬
‭customer in one period.‬
‭— Income that has been earned but not yet received is called accrued income‬
‭— Unearned Subscription Income is a liability account‬
‭— Under the accrual basis of accounting, revenue is recognized and recorded in the period when it‬
‭is earned regardless of when cash related to the transaction is received.‬
‭— When the estimate of losses from uncollectible accounts is based on the‬‭aging method‬‭, the‬
‭primary concern is the proper valuation of accounts receivable on the balance sheets.‬
‭●‬ ‭Proper Valuation‬‭means estimating and reporting the net realizable of accounts‬
‭receivable‬
‭— The balance of Allowance for Doubtful Account is‬‭subtracted‬‭from the balance of Accounts‬
‭Receivable on the Balance Sheet‬
‭— The adjusting entry to record estimated losses from uncollectible accounts consists of credit to‬
‭allowance for doubtful accounts‬
‭—‬‭Allowance for Doubtful Accounts‬‭has a‬‭normal credit‬‭balance‬‭.’‬
‭— Allowance method is the practice of estimating losses from uncollectible accounts‬‭before‬‭specific‬
‭accounts become uncollectible.‬
‭— An account that is‬‭over 60 days past due‬‭is least‬‭likely to be collected‬
‭— ‘After the adjusting entry is made to record the estimate of losses from uncollectible accounts,‬
‭Allowance for Doubtful Accounts should have a credit balance.‬
‭— Aging the accounts receivable is the procedure that‬‭groups accounts receivable‬‭according to‬
‭the‬‭length of time they have been outstanding‬
‭— Allowance for Doubtful Accounts is included within the Balance Sheet.‬
‭— Allowance for Doubtful Accounts is a‬‭contra asset with a normal credit balance‬
‭●‬ ‭Contra Assets are used to reduce the carrying amount of certain assets to reflect‬
‭their net realizable value or an estimate of the potential losses.‬
‭—The adjusting entry to record estimated losses from uncollectible accounts consists of a‬
‭- Debit: Uncollectible Accounts Expense‬
‭- Credit: Allowance for Doubtful Accounts‬
‭— The balance of the Allowance for Doubtful Accounts account is reported as a deduction from‬
‭Accounts Receivable on the balance sheet‬
‭●‬ ‭Because it is a credit; credit = subtract‬
‭— The‬‭allowance method based on aging the accounts receivable‬‭is the method of accounting‬
‭for losses from uncollectible accounts that results in a valuation of the accounts receivable on the‬
‭balance sheet that is a more reasonable estimate of the actual amount expected to be collected.‬
‭— Under the Allowance Method of accounting for uncollectible accounts, a firm may base their‬
‭estimate of uncollectible accounts on all of the following: (1) net credit sales for the year, (2) aging of‬
‭accounts receivable at the end of the year, and (3) total accounts receivable at the end of the year.‬
‭— Common internal controls for accounts receivable would not include allowing all sales personnel‬
‭to charge off any accounts deemed uncollectible‬
‭— Uncollectible Accounts Expense is an‬‭expense on the income statement.‬
‭— The recorded cost of an asset should include both the net invoice price and all transportation and‬
‭installation costs.‬
‭— The cost of land reported on the balance sheet is not depreciated.‬
‭●‬ ‭Any land cannot lose value; it either stays the same or goes up‬
‭ Book Value is the‬‭asset’s cost less the accumulated depreciation‬‭to date.‬
—
‭— Both the balances in the‬‭depreciable asset accounts‬‭, and a‬‭description of the method(s)‬
‭used‬‭to compute depreciation, are either‬‭shown on the financial statements‬‭or in‬‭notes‬
‭accompanying the financial statements‬‭.‬
‭— A standard internal control procedure for fixed assets includes maintaining an asset register‬
‭listing all capital assets, their costs, acquisition dates, location, and any other useful information.‬
‭—‬‭Capitalized Costs‬‭are all costs incurred to purchase‬‭an asset and get it in proper working‬
‭condition, such as net purchase price, transportation cost, installation costs, and costs of‬
‭adjustments or modifications.‬
‭—Track fixed asset movement sufficiently such that a physical inventory is unnecessary is‬‭NOT‬‭a‬
‭standard internal control procedure for fixed assets.‬
‭— If the property used in a business has‬‭physical‬‭substance‬‭and is‬‭NOT‬‭real estate,‬‭it is tangible‬
‭personal property.‬
‭— The book value of an asset is the‬‭portion of the‬‭asset’s cost that has not yet been charged to‬
‭expense‬
‭— Example of real‬‭property‬‭is a building‬
‭— The straight-line method is the most widely used method of computing depreciation expense for‬
‭financial statement purposes.‬
‭—Adjusting entries are made because some business events are‬‭NOT‬‭recorded as they occur‬
‭—‬‭Physical count is required‬‭, for monitoring and internal‬‭control purposes, regardless of the‬
‭method used.‬
‭— Net income will be‬‭UNDERSTATED‬‭if adjusting entry‬‭for accrued revenue will‬‭NOT‬‭be made‬
‭— Adjusting entry for salaries expense‬‭incurred but‬‭STILL UNPAID‬‭includes a‬‭debit to an‬
‭expense account‬‭and a‬‭credit to a liability account.‬
‭— Adjustments for accruals are‬‭prepared when recognition‬‭precedes cash flow‬‭while‬‭cash flow‬
‭precedes adjustments for deferrals.‬
‭— Expenses paid before being consumed are‬‭initially‬‭recorded as an asset‬‭.‬
‭— When a portion of the unearned income has already been earned, the adjusting entry will include‬
‭a‬‭debit to the unearned income account‬‭.‬
‭— Accumulated depreciation and allowance for doubtful accounts have‬‭contra asset accounts‬‭and‬
‭are presented as‬‭part of total assets presented as‬‭deductions.‬
‭— Under the allowance method, the net realizable value of accounts receivable is obtained by‬
‭deducting the ending balance of the Allowance for Doubtful Accounts‬
‭— Allowance for Doubtful Accounts represents a portion of the receivables that are‬‭estimated to be‬
‭uncollectible by the entity‬‭.‬
‭— Descriptions of adjusting entries‬
‭- Adjusting entries will‬‭affect the net income‬‭of‬‭the entity‬
‭- Adjusting entries precede‬‭the preparation of financial statements‬
‭- Adjusting entries affect at least‬‭one nominal (temporary) account‬‭and‬‭one real‬
‭(permanent) account‬‭.‬
‭— An understatement of ending inventory will cause‬‭an understatement of assets and equity on‬
‭the Statement of Financial Position‬‭.‬
‭— Rented a small portion but remains unpaid as of the end of the accounting period:‬
‭- Debit: Accrued Rent Revenue‬
‭- Credit: Rent Revenue‬
‭— Made an error by failing to include months unpaid utility bill in the list of expenses:‬
 -‭ NET INCOME: Overstated‬
‭- LIABILITIES: Understated‬
‭— If an adjustment for the earned portion of an Unearned Revenue is not made,‬‭Net Income and‬
‭owner’s equity will be understated‬‭while‬‭liability‬‭will be overstated‬‭.‬
‭— Reasons for not crediting the asset account directly (credit accumulated dep. instead of making‬
‭direct credit to the asset acct.)‬
‭- amount of the depreciation taken‬
‭up is only an estimate‬
‭- SFP would continue to show the‬
‭full cost of the asset‬
‭- SFP would show the aggregate‬
‭depreciation recorded over the years‬
‭— Failure to account for residual value of a depreciable asset will overstate total expenses.‬
‭— The advantage of relating doubtful accounts to accounts receivable is that this approach‬‭gives a‬
‭reasonably correct measurement of accounts receivable in the SFP‬‭.‬
‭— Accrued rent income at the end of the period was not recorded (error) would understate the‬
‭assets of the business.‬
‭— Accrued income (adjusting entries) will increase both net income and total assets‬
‭— If utility bills were received for the month, the reported utility expenses for the period will be the‬
‭same.‬
‭●‬ ‭But if it was asking for the accrued utility expense, then we subtract utility expense and cash‬
‭paid‬
‭— Accumulated Dep.‬
‭Equipment - Estimated Residual Value‬
‭Depreciable Amount / Estimated useful life‬
‭Annual Depreciation + Depreciation Expense – year‬
‭= Accumulated Depreciation‬
‭— Allowance for doubtful accounts, end‬
‭= Accounts receivable*allowance percentage (reasonable estimate for the doubtful accounts)‬

In calculating the net income, you add the merchandise inventory, end.