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MU ACC 221 - Exam 2 Study Guide

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ACC 221 1st EditionExam # 2 Study Guide Lectures: 13 - 20Lecture 13 (February 24) – The Cash AccountWhat are reconciliations? Verifying that the company’s cash account and the bank’s account match. This is done by adjusting and accounting for various entries within the system. What happens when the bank balance is wrong?Deposit outstanding – bank has not yet added deposits into your account, requires no entry from you.Check outstanding – bank had not yet received checks to take money out of your account. Dr. Expense, Cr. CashWhat happens when the Company Balance is wrong?Service Charges – fees owed to bank from various services; bank balance is correct, your balance is incorrectCr. Cash is decreasing balanceCollection of a note – bank will handle collection for company for a feeDr. Cash, Cr. Note receivableDr. Cash Cr. Interest receivableDr. Service Charge, Cr. Cash Lecture 14 (February 27) – Review Cash AccountWhat is the main function of the cash account?Main function is to have the company’s money flowing in and out. However, at the end of the accounting cycle when reconciling the balances, the balance may not always be correct, depending on if all of the transactions have been recorded in both the company’s side and the bank’s side of the balance recordings. Lecture 15 (March 2) – Cash Reconciliation and Accounts ReceivableWhat are Non-Sufficient Funds Checks? Occurs when a customer bounces a check to the company. The check is written into the company accounting system before being brought to the bank to be deposited. At the bank, the money is put into the account, and then taken directly out, because the person had insufficient funds, leaving a net of $0. Must reconcile to match the bank’s statements. Dr. Accounts receivable, Cr. CashWhat is a company error in the accounting system? The company has made an error in recording an item: lower cash too much/ too little or deposit too much/ too little through miscalculations or transcribing incorrectlyOriginal: Dr. Rent Expense, Cr. CashCorrecting: Dr. Cash, Cr. Rent ExpenseHow does not getting paid affect Accounts Receivable?If we are not getting paid, we much remove this money from the assets in one of 2 ways: Direct Write-off method – remove customer, amount, and entries from accounts receivable sub ledger. This method is generally not used within the accounting system, because it violates the matching principle; expenses and revenue may not match within the period, if events occur within different periods.Dr. allowance of uncollectable accounts, Cr. Accounts ReceivableAllowance method – combined estimates with actual numbers: end of accounting period, record estimate of bad debt (Dr. bad debt expense, Cr. Allowance of uncollectable accounts). This allows expenses to be in the same cycle as revenue, while having little impact on the system and balance sheets. Once you know who will not be paying back the company: (Dr. Allowance, Cr. Accounts receivable).Accounts receivable – allowance of uncollectable accounts = net realizable value Lecture 16 (March 4) – Allowance and Notes ReceivableIf your previously written-off expense decides they can pay, how do you reinstate an account?Reinstating n account will bring the individual back into the accounts receivable, so you will reverse the writing off account transaction. Dr. Accounts receivable, Cr. AllowancePaying off: Dr. Cash, Cr. Accounts ReceivableHow do you estimate the amount of accounts receivable that will not be collected? Single percent method – Percentages are reasonable stable over long periods of time in anestablished company, so may be fairly accurate. Balance of accounts receivable x estimated % = estimate that won’t be paid backAging Method - Takes into consideration the age of each individual account and assigns each its own percentage, depending on what time frame it falls underHow to adjust the allowance account?This is what we should use as the ending balance for allowance, representing the amount of accounts receivable that we are not expecting to collect. Balances are in the credit side of account.Ending balance $12,000, estimating $10,000, adjust: Dr. allowance $2,000, Cr. Bad debt $2,000Ending balance $12,000, estimating $15,000, adjust:Dr. Bad debt expense $3,000, Cr. Allowance $3,000What are notes receivable?Legally binding contract, person agrees to pay full amount, plus interest, in exchange for having additional time to pay off the money. Day person signs the note – Dr. note receivable, Cr. Accounts receivableAdjusting for interest – Dr. interest receivable, Cr. Interest expenseDay person pays off note – Dr. cash, Cr. Note receivableLecture 17 (March 6) – account receivables and salesHow do you calculate net revenue?Total revenue – (discounts, returns, and allowances) = net revenueDiscounts, returns, and allowance are all contra accountsHow to use Percentage-of-credit sales for estimating uncollectable accounts?Adjust allowance account for current year’s credit sales we don’t expect to collect, rather than adjusting for the percentage of accounts receivable that the company is not expecting to collect.Lecture 18 (March 9) – Revenue and Inventory AccountsWhat are sales discounts?2/10 net 30 = % off if paid within 10 days. If not, payment due within 30 days. Dr. accounts receivable $100, Cr. Sales revenue $100Within 10 days: Dr. cash $98, Dr. Sales Discount $2, Cr. Accounts receivable $100Not within 10 days: Dr. Cash $100, Cr. Accounts receivable $100Returns v. allowance?Returns – Dr. accounts receivable, Cr. Sales revenueReturning for full refund: Dr. sales, returns, allowances, Cr. Accounts receivableAllowance – Dr. accounts receivable $100, Cr. Sales revenue $100Product faulty, but customer wants to keep, grant $20 allowanceDr. sales, returns, and allowance $20, Cr. Accounts receivable $20Pay off: Dr. ash $80, Cr. Accounts receivable $80The inventory accounts?FIFO – First in, first out: item waiting the longest is sold first, eliminates inventory from getting hung upLIFO – Last in first out: Item waiting shortest amount of time is sold first; because operating under the assumption that inflation is taking place, continuously raising the prices. This way you are selling the most expensive items. Physical flow does not necessarily have to match the accounting system flow. Each may use whichever method they would like.Lecture 19 (March 11) - InventoryWhat is the difference between LIFO and


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