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UMass Amherst ACCOUNTG 221 - Interest

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ACCOUNTG 221 1st Edition Lecture 7 Outline of Last Lecture I. Lab Help and Test ReviewII. Accrual and Deferral Review III. Introduction to Chapter 3 a. Debits and Creditsb. Examples Outline of Current Lecture I. DEADII. Interesta. Expense and revenue b. Note payable c. How to calculate interest Current LectureDEAD: These accounts have regular debit balances, all others have regular credit balances D- DebitE- ExpensesA- AssetsD- Dividends Interest (Expense or revenue) Note payable has interest expense Note receivable has interest income (later chapter) Calculated as: Principal x Rate* x Time**- *Where rate is always ANNUAL or over 12 months- **Where time is months outstanding over 12  Ex. If 6 months have occurred : time = 6 months/ 12 months = .5 Ex. 3 month note payable, accrued 1 month - Principal x Rate x Time (= 1 month (accrued 1 month) / 12 months in the year) Ex. Prepaid Insurance, 24 months in advance, used 6 months- NOT INTEREST PROBLEM! PREPAID PROBLEM - Prepaid’s are over how many months you paid for totalThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. =6 months/ 24 months  When you accrue interest you: debit interest expense (expense) (RE) credit interest payable (liability)  Cash Flows? Principal = Financing Activity Interest Expense = Operating Activity  General Journal  Accountants initially record data from source documents into a journal *booking transaction when it happens = matching


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