Sunday, October 11, 2009

3 accounting fun facts!

Why get an MBA to learn accounting when you can just read this blog??

1. Customers spent $220,000 on merchandise over the accounting period. Forty percent was in cash; the rest was on account. The merchandise cost $160,000 to buy. The journal entries look like:

Dr. CASH ............ $88,000
Dr. A/R ............... $132,000
Cr. SALES ..................... $220,000

Dr. COGS ............ $160,000
Cr. INVENTORY ........... $160,000

2. During the accounting period, the last principal payment was made on a loan, as was interest. The former is a financing expense; the latter an operating expense that, if paid in cash, would not appear in the indirect statement of cash flows because it would not be an adjustment to net income. (It would, of course, appear on a direct statement of cash flows, because it would be a use of cash for operations.)

3. Accumulated depreciation goes in a contra-asset account. If a piece of equipment was purchased for $4,500 and has an estimated life of five years, and is subject to straight-line depreciation, then after one year the $4,500 remains in the Equipment T-account, but $900 is credited to the Accumulated Depreciation contra-asset. On the balance sheet, this may appear as two items, or as one $3,600 item listed as "Equipment, Net." The depreciation is balanced with a depreciation expense that will appear on the indirect statement of cash flows in the operations area, because it is a non-cash adjustment to net income.

Somebody check my work.

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