Accounting 101 common sense Income Statement Sales Sales Revenue Less Sales returns and allowances Sales discounts Net Sales Cost of Goods Sold Gross Profit Operating Expenses Salaries and wages expense Utilities expense Advertising expense Depreciation expense Freight out Insurance expense Total operating expenses Income from operations Other revenues and gains Interest Revenue Gain on disposal of Assets Other expenses and losses Interest expense Casualty loss from vandalism Income before income taxes Income tax expense Net income 12 000 8 000 64 000 17 000 16 000 8 000 7 000 2 000 3 000 600 1 800 200 480 000 20 000 460 000 316 000 144 000 114 000 30 000 3 600 2 000 31 600 10 100 21 500 Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Other Revenue and Gains Other Expenses and Losses Net Profit Cost of Goods Sold Beginning Inventory Cost of Goods Purchased Cost of Goods Available for Sale Ending Inventory Cost of Goods Sold Balance Sheet NAME OF COMPANY Balance Sheet As of the End of the Period Assets Current Assets Ex cash short term investments accounts Long term investments Ex investments in bonds investments in stocks Property plant and equipment Land Buildings and equipment Less Accumulated depreciation Intangible Assets Total assets Balance Sheet Liabilities and Stockholder s Equity Liabilities Current Liabilities Ex notes payable accounts payable accruals unearned revenues current portion of notes payable Long Term Liabilities Ex investments in bonds investments in stocks Total Liabilities Stockholders Equity Common Stock Retained earnings Total liabilities and stockholders equity Retained Earnings Statement Retained earnings beginning of period Add Net Income or deduct net less Deduct Dividends Retained earnings end of period xxx xxx xxx xxx xxx Adjusting Entries Unearned Revenue xxx Expense Asset Revenue Asset Revenue Expenses Liabilities xxx xxx xxx xxx xxx xxx xxx Prepaid Expenses paid in cash and recorded as assets before they are used or consumed Unearned Revenue cash has been received before the goods or services are provided Accrued Revenue revenue earned but not yet recorded as of the financial date Accrued Expenses expenses incurred but not yet paid or recorded as of the financial statement date Closing the Books Temporary Permanent All revenue accounts All expense accounts Dividends All asset accounts All liability accounts Stockholders equity accounts Closing the books GEN JOURNAL CLOSING ENTRIES Revenue Income Summary Income Summary Expenses Income Summary Retained Earnings Retained Earnings Dividends 10 600 7 740 2 860 500 10 600 7 740 2 860 500 Perpetual Inventory System Buyer Inventory 3 800 Accounts Payable Purchase of merchandise on credit Freight costs on purchases Inventory Cash Purchase returns and allowances Accounts Payable Inventory Accounts Payable 3 500 Payment on account with a discount Cash Inventory 150 300 3 800 150 300 3 430 70 Perpetual Inventory System Seller Sale of merchandise on credit Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Freight costs on merchandise Freight Out Cash Return of merchandise sold Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold Cash received on account with a discount Cash Sales Discount 3 800 2 400 150 300 140 3 800 2 400 150 300 140 3 430 70 Accounts Receivable 3 500 FIFO Date Jan 1 Apr 15 Aug 24 Nov 27 Explanation Beginning Inventory Purchase Purchase Purchase Total Units 100 200 300 400 1 000 Unit Cost 10 11 12 13 Total Cost 1 000 2 200 3 600 5 200 12 000 Ending Inventory for 550 units sold Cost of Goods Sold Date Nov 27 Aug 24 Units 400 50 450 Unit Cost 13 12 Total Cost 5 200 600 5 800 Cost of goods available for sale Less Ending Inventory 12 000 5 800 Cost of goods sold 6 200 LIFO Date Jan 1 Apr 15 Aug 24 Nov 27 Explanation Beginning Inventory Purchase Purchase Purchase Total Units 100 200 300 400 1 000 Unit Cost 10 11 12 13 Total Cost 1 000 2 200 3 600 5 200 12 000 Ending Inventory for 550 units sold Cost of Goods Sold Date Jan 1 Apr 15 Aug 24 Units 100 200 150 450 Unit Cost 10 11 12 Total Cost 1 000 2 200 1 800 5 000 Cost of goods available for sale Less Ending Inventory 12 000 5 000 Cost of goods sold 7 000 Direct Write Off Method for Uncollectible Accounts unaccepted method Bad Debt Expense xxx Accounts Receivable xxx Allowance Method for Uncollectible Accounts Bad Debt Expense xxx Allowance for Doubtful Accounts xxx write off when collection appears unlikely to never be collected again Allowance for Doubtful Accounts xxx Accounts Receivable xxx Recovery for An Uncollectible Account Accounts Receivable Allowance for Doubtful Accounts To reverse the write off of the account Cash Accounts Receivable To record collection xxx xxx xxx xxx Computing Interest Face Value x Annual Interest x Time in Terms Interest of Note Rate of Year Notes Receivable Recognizing Notes Receivable Notes Receivable 10 000 Accounts Receivable 10 000 Honor of Notes Receivable Cash 10 375 Notes Receivable Interest Revenue 10 000 375 Accrual of Interest Receivable To reflect interest earned but not yet received Interest Receivable 10 000 x 9 x 4 12 Interest Revenue 300 300 When it is received Cash 10 000 10 000 x 9 x 4 12 10 375 Notes Receivable Interest Receivable Interest Revenue 10 000 x 9 x 1 12 10 000 300 75 Depreciation Straight Line Method Cost Salvage Value Depreciable Cost Depreciable Cost Depreciable Useful Life in years Expense Sale of Plant Assets GAIN ON SALE Depreciation Expense 8 000 Accumulated Depreciation 8 000 Cash Accumulated Depreciation Equipment Gain on Disposal of Plant Assets 60 000 5 000 16 000 49 000 60 000 49 000 11 000 16 000 5 000 Cost of equipment Less Accumulated depreciation Book value at date of disposal Proceeds from sale Gain on disposal of plant asset Sale of Plant Assets LOSS ON SALE Depreciation Expense 8 000 Accumulated Depreciation 8 000 Cash Accumulated Depreciation Loss on Disposal of Plant Assets 9 000 49 000 2 000 Equipment 60 000 Cost of equipment Less Accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal of plant asset 60 000 49 000 11 000 9 000 2 000 Retirement of Plant Assets Accumulated Depreciation xxx Plant Asset xxx The loss is equal to asset s book value Issuing Bonds at Face Value A corporation issues 100 five year 10 1 000 bonds dated Jan 1 2014 at 100 100 of face value Jan 1 Cash Bonds Payable To record sale of bonds at face value 100 000 100 000 If interest is payable