acct Cheat Sheet by koo

Closing entries formally recognize in the ledger the transfer of net income (or net loss) and Dividends to Retained Earnings. Companies generally journalize and post closing entries only at the end of the annual accounting period. Closing entries produce a zero balance in each temporary account.

Transfer the revenue and expenses accounts to income summary, and then transfer income summary to retained earnings. Transfer dividend to retained earnings directly.

After closing, all temporary accounts should have the balance of ZERO (check the T-account and trial balance).

The correct order of presen­tation in a classified balance sheet for the following current assets is: cash, accounts receiv­able, inventory, prepaid insurance.

Liquidity- ability to pay obliga­tions expected to be due within the next year. (long-­term: after 1 yr.)

Operating Cycles: The operating cycle of a
merchandising company ordinarily is longer than that of a service company.
Merchandise Company (Buy & Sell Goods) vs
Manufacturing Company

Concept of Perpetual inventory system and periodic inventory system.
Perpetual System
-Maintain detailed records of the cost of each inventory purchase and sale.
-Records contin­uously show inventory that should be on hand for every item.
-Company determines the cost of goods sold each time a sale occurs.
Periodic System
-Do not keep detailed records of the goods on hand.
-Cost of goods sold is determined by count at the end of the accounting period.

-Freight Costs
-Purchase Returns and Allowances
-Purchase Discounts (What are Credit Terms?)
Example: credit terms 2/10, n/30, which is read “two-ten, net thirty”. This means that the buyer may take a 2% cash discount on the invoice price, less (“net of”) any returns or allowa­nces, if payment is made within 10 days of the invoice date (the discount period).

Apply the steps in the accounting cycle to a
merchandising company.

-Sales revenue
-Net sales
-Gross profit
-Operating expenses
-Nonoperating activities
-Net income

Determ­ining Inventory Quantities

Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost due to wasted raw materials, shopli­fting, or employee theft.
Periodic System
1. Determine the inventory on hand.
2. Determine the cost of goods sold for the period.

Inventory is accounted for at cost.

Cost includes all expend­itures necessary to acquire goods and place them in a condition ready for sale.

Statement Presen­tation:

-Ending invent­ories: Balance sheet (current assets)
-COGS: Income statement (subtr­acted from sales)

Amounts due from indivi­duals and companies that are expected to be collected in cash.

Written promise for amounts to be received. Normally requires the collection of interest.

Bad debts result from credit customers who will not pay the amount they owe, regardless of collection efforts.

Accounts receivable

Bad Debt Expense (or uncoll­ectible account expense) incurred when the uncoll­ectible accounts are estimated, not when someone fails to pay back.

1. Readily conver­tible to known amounts of cash
2. So near their maturity that their market value is relatively insens­itive to changes in interest rates.
ex: Treasury bills, commercial paper (short­-term corporate notes), and money market funds.

Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Five Primary Compon­ents:

1. A control enviro­nment.
2. Risk assess­ment.
3. Control activi­ties.
4. Inform­ation and commun­ica­tion.
5. Monito­ring.

Generally, internal control over cash disbur­sements is more effective when companies pay by check or electronic funds transfer (EFT) rather than by cash.

Used to pay small amounts.