Debits Increase Assets Expenses Dividends Credit Decrease Assets Expenses Dividends Credits Increase Liabilities Common Stock Retained Earnings Revenues Debits Decrease Liabilities Common Stock Retained Earnings Revenues Sales Beg Inv Purchases End Inv COGS Gross Profit Net Income Period 1 overstated no effect no effect no effect overstated understated overstated overstated Period 2 overstated no effect overstated no effect no effect overstated understated understated Balance Sheet purchase short term trading investment market value current assets Income Statement adjustment other revenue and gains losses short term inv unrealized gain on investment unreal gain Trading Securities Adjusted to fair value UNrealized gain loss Sold realized gain loss Units of Production cost r value units of production depr cost per unit depr cost per year depr cost per unit X amount produced that year Book Value cost accum depr value 2 10 2 amount of disc 10 of days n 30 n net amount 30 of days to pay full amount Adjusting Entries Write off of uncollectible dr allow for uncoll act cr a r uncoll act exp of sale rev dr uncoll act exp cr allow for uncoll act Subsidiary Ledger keeps track of individual customers in separate account End Inv COG Gross Profit U U U O O U Allowance Method estimates Direct write off no estimates overstates assets fails to show amount of rec comp expects to collect 4 Inventory Methods Specific Unit very specific exp Avg Cost weighted avg FIFO first bought first sold milk LIFO last bough first sold salt balance sheet is buying price income statement is selling price unrealized gain Beg Inv Purch Units Units avail to sell end inv sold Avg Cost avg cost per unit cost of goods avail to sell X of units end inv avg cost per unit X units in end inv COGS cost of goods avail for sale end inv FIFO cost per unit total cost units beg inv purch of units beg inv of units purch ending inv X most recent goods purch end inv beg inv purch end inv COGS LIFO ending inv X oldest units purch end inv beg inv purch end inv COGS relative sales method market sale value total market value X total cost cost of each asset capital expenditure expen that increases an asset s capacity efficiency extends its useful life dr sales tax transportation insurance for object in transit purchase price installation training of personnel special reinforcement expense decrease in retained earnings that results from operations cost of doing business income tax paid on income earned repairs Double Declining Balance 2 of years X original cost depr value cost depr value DDB depr year 1 cost DDB depr X DDB depr year 2 Book Value cost accum depr value FOB destination seller recognizes sale when goods arrive at buyer FOB shipping point when goods leave shipping dock How to Determine Net Sales Rev Sales Rev Less Sales R A Less Sales Disc Net Sales Rev Straight Line Depr depr value cost r value years same for entire life Book Value cost accum depr value Inventory Methods COGS LIFO Income Statement lower net income better matching of exp to rev Ending Inv FIFO provides more up to date inv cost more realized Balance Sheet LIFO assoc w saving income tax enables comp to buy high cost inv results in old measure of cost of end inv enables comp to keep reported income from dropping lower by liquidating older layers of inv FIFO cost of end inv that is close to current cost of replacing inv maximizes reported income Specific Unit Cost used to acct cars jewelry art All 4 writes inv down when replacement cost drops below historical cost Corrected Balance ending inventory original balance error Corrected Balance COGS original balance error Corrected Gross Profit sales rev net sales corrected COGS Int Rev principal X int rate X time Total principal interest given months How to Determine Net Act Rec A R Less Allow for Uncoll Net A R unrealized has not been sold yet we still own it unrealized gain loss fair value of investment is greater less than the cost aging of receivables estimating uncollectible act by analyzing individual A R according to the length of time they have been outstanding balance sheet sales rev is based on the sales price of inventory while COGS is based on the cost of the inventory
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