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Intangible Assets

Long-term intangible item bought or created such as a copyright, patent, or goodwill.

To write off an noncollectable account/Direct write off method

Debit to Bad debt expense and a credit to accounts receivable

A fixed asset that is nondepreciating.


Steps for straight line depreciation

1. Cost - Salvage / the number of years equals Annual depreciation. 2. Purchase price minus depreciation equals year end value. 3. Repeat with year end balance minus depreciation for the estimated number of years.

Aging of accounts receivable method of writing off bad debt (balance sheet method).

Needs: 1. Balance of accounts receivable. 2. Groups are estimated by a certain percentage. 3. Groups are totaled to find an ending balance.

Units of Production Depreciation:

Cost - Salvage / # of units = Depreciation expense per unit.

Matching Principle

Must record expenses incurred to generate revenue reported, in the period when they contribute to the earning of revenue


Something a business owns.

Income Statement

Summarizes Revenues and expenses for a period of time. Revenue - expenses = Net income

Sales allowance granted without return of product - Journal entry.

Debit sales allowance and credit accounts receivables.

Return of merchandise for credit (Seller).

Debit sales returns and allowances, credit accounts receivable, debit merchandise inventory, credit cost of goods sold.

Cash Flow Financial Statement

Sumarizes changes in cash for a period of time.

Receipt of payment with discount taken - Journal entry.

Debit to cash, debit to sales discounts, credit to accounts receivable.

Accounting Equation

Assets(resources owned) = Liabilities(creditors claims on assets) + owners equity(Owners claims on assets/residual equity).

Payment for merchandise without discounts (buyer) - Journal entry.

Debit to accounts payable and credit to cash.


Record that includes all activity for that account.

Return merchandise - journal entry

Debit to accounts payable and credit to merchandise inventory.

Purchase of Merchandise on account - Journal entry

Debit to merchandise inventory and credit to accounts payable.

Payment of inbound freight cost.

Debit to Merchandise inventory and credit to cash.

Chart of accounts

A list of Account types.

Sales Revenue description

Account type - Revenue, Normal balance - Credit side, financial statement - Income statement

Cost of Goods Sold description

Account type - Expense, Normal balance - Debit side, financial statement - Income statement


Revenue is recognized when earned (regardless of when cash is exchanged). Expenses are recognized when incurred. Or as directed by the matching principle.

Delivery Expense description

Account type - Expense, Normal balance - Debit side, financial statement - Income.

Sales discount description

Contra account - revenue, Normal balance - Debit side, financial statement - Income

Inventory Description

Account type - current assets, normal balance is debit side, financial statement is balance statement

Cost Principle

Purchases must be recorded for what the owner paid, not what owner thinks it is worth. Actual cost.

Purchased Merchandise journal entry

When it is purchased it is posted to merchandise inventory.

Sold Merchandise journal entry

When it is sold it is posted to Cost of Goods Sold.

Cost Flow

Movement of cost of merchandise from merchandise inventory to the cost of goods sold account.

Fixed asset

A long term tangible asset utilized in the day to day activities such as land, equipment, furniture, vehicles, etc.

Revenue Recognition Principle

1. Revenue is recognized when earned, 2. Proceeds need not be in cash, 3. It is measured by the cash received plus cash value of any other items received.

Perpetual Inventory System

The balance of perpetual inventory reflects dollar value of the inventory on hand and available to be sold.

Sales returns and allowances description

Account type - Contra revenue, normal balance - debit side, financial statement - income statement

Depreciation-deferred journal entry

Debit to depreciation expense and a credit to accumulated depreciation expense.

Current Asset

Already cash or will be converted into cash or consumed in the next 12 months. Examples: Accounts receivables, cash, prepaid rent, prepaid insurance, etc.

Deferred Revenue

To record revenue after cash is received.

Deferred revenue journal entry

Debit to liability and a credit to revenue.

Adjusting process relies on two things...

Revenue recognition and matching principle.

Deferred Expense

To record expense after cash is paid. Example: prepaid rent, prepaid insurance, etc.

Deferred expense journal entry

Debit to expense and credit to liability.

Gross Profit

Revenue minus cost of goods sold.

Accrue, accrued, accrual

Put on books before cash is received

Accrual journal entry

Debit to asset and credit to revenue.

Book Value

Is cost minus accumulated depreciation.

Accumulated Depreciation account type?

Contra fixed account

Perpetual inventory system

Maintains a continuous record of the amount of merchandise inventory on hand and available to be sold.

Formula to compute interest

I (interest) = P (amount) x R (rate) x T (time)

What are the two techniques used to write off noncollectables under the allowance method?

1. Income statement method - Percentage of sales based on the relation between bad debt expense and sales. 2. Balance sheet method - Accounts receivable, use balance sheet relations to estimate bad debt by a. computing percentage of bad debt from total accounts receivable, and b. Aging of accounts receivable.

Allowance write off method

Under the allowance method, estimate how much you think you are going to lose then write it off before you lose it.

Recovering a Bad Debt journal entry

1. To reinstate account previously written off - debit accounts receivable/customers account name, then credit bad debt expense. 2. To record full payment of account, debit cash and credit accounts receivable/customers account.

Tangible asset

It is a fixed asset.

Depreciation is...

A cost allocation process. The process of allocating the cost of a fixed asset to future accounting periods.


First In First Out Inventory system. In a period of rising prices FIFO makes more money.


Last In First Out inventory system. In a period of declining prices LIFO makes more money.

Interest earned journal entry

Debit to cash and credit to interest revenue

Accrued Expense

Record expense before cash is paid - debit to expense and a credit to liability

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