Financial Accounting - Module 4: Adjusting Journal Entries
how to identify explicit transactions
- A transfer of resources, usually cash - Invoices, receipts or other paper documentation - A specific event or activity that clearly triggers a journal entry - Clarity regarding when to record and how much to record
Product Costs
- All costs that are involved in acquiring or making a product. In the case of manufactured goods,
Period Costs
- Costs that are matched with the revenue of a specific time period and charged to expense as incurred.
How to identify implicit transactions
- No transfer of resources - No invoices or other paper documentation - No specific event or activity that clearly triggers a journal entry, just the passing of time - Judgement regarding when to record and how much to record
what are the stages of inventory?
- Raw materials - work in process inventory or WIP (includes labor and overhead costs) - finished goods inventory
difference between Deferred Tax Liability with Taxes Payable
- Taxes Payable - taxes you actually owe based on what the government says you owe - deferred tax liability is much more complex
Explicit Transactions
- Transactions that involve some activity, event, or exchange of resources from one party to another. - are often accompanied by invoices or other paper documentation that initiates the recording of the transaction.
Allowance for Credit Losses
- contra account - used when credit providers need to adjust their journal entries to recognize potential credit risks
Record this transaction recognizing there is tax to pay
- credit taxes payable - debit income tax expense - debit differed income asset ( think its opposite for liability)
Journal entry for amortization
- debit amortization expense - credit accumulated amortization
journal entry to record impairment - good will
- debit impairment loss - credit goodwill
Record this transaction payment of tax
- debit taxes payable - credit cash
if certain receivables are deemed uncollectible for sure, how to write them off form the balance sheet
- decrease the receivables account value (credit) - decrease allowance account value (debit)
benefits of utting accumulated depreciation into a separate account
- easily see the original cost of the asset so you can compare it to the current or replacement cost at any point in time - quick feel for how old the assets of the business are
Long-Lived Assets
- expected to provide value to the business for periods in excess of one year - physical assets: buildings, vehicles, or machines - intangible assets: patents or goodwill - sometimes referred to as fixed assets
Last-In, First-Out (LIFO)
- inventory valuation method - current units sold are the newest units placed into inventory - Last In First Out - leaves the lower costs in the inventory account - recognizes the latest, higher costs as an expense in Cost of Goods Sold
First In First Out (FIFO)
- inventory valuation method - current units sold are the oldest units remaining in the inventory - First In First Out - leaves the higher costs in the inventory account - recognizes the older, lower costs as an expense in Cost of Goods Sold
Amortization
- method for recognizing the expense of long-lived intangible assets over the life of the assets - usually calculated similar to straight-line depreciation - used by some companies, or they might just reduce the value of the associated asset
Depreciation
- method for recognizing the expense of long-lived physical (tangible) assets over the life of the assets
Periodic Inventory System
- method of determining the ending value of inventory and cost of goods sold - transactions are not recorded on a regular basis - physical count of inventory is performed periodically - cost of goods sold = value of counted inventory - goods available for sale
perpetual inventory system
- method of inventory tracking - all inventory purchases and movements are recorded when they occur - transactions ntered into an inventory tracking system which is integrated with the accounting system - value of inventory can be reported by the system at any time - caveat some businesses still perform inventory counts even if they use this system
What are the 4 basic types of adjusting journal entries
- recognizing expenses related to a prepaid asset - Recognizing revenues related to deferred revenue (also called unearned revenue) - Accruing of unrecorded expenses - Accruing of unrecorded revenues
Journal entry for asset disposal
- remove asset from the books: credit the amount of the asset for the full amount - remove accumulated depreciation associated with the asset: debit the account - record transaction for when the asset was sold: i.e cash, debit this - to balance: record gain on sale (credit) or loss on sale (debit)
Common methods for depreciation
- straight lined depreciation - double declining balance depreciation - others
Gross Book Value
- the amount for which a business records the asset in its books - the original cost of asset before deducting accumulated depreciation
units of measure depreciation
- used on assets that have a more fixed output potential - proportionate to the number of products that it produced
Deferred Tax accounts
- whether they are liabilities or assets, always relate to subsequent years
how to get allowance ending balance
Allowance Beginning Balance + Bad Debt Expense − Write‐offs = Allowance Ending Balance
Apple decides to allocate $950 of the purchase price toward the phone itself, and $50 toward the software updates they will provide over the next year. Before the sale, the phone was in Apple's inventory valued at $500. Create a journal entry for the date of the sale, October 1, 2018.
Apple needs to first note the receipt of cash and the loss of inventory by debiting Cash for $1000 and crediting Inventory for $500. Then they need to record the revenue: debit Cost of Goods sold by $500, credit Revenue for $950, and then credit Deferred Revenue (the software updates) for $50.
___________ are recorded so that the financial statements accurately reflect what amount of taxes relates to the current accounting period income, and what amount of taxes relates to income in other periods
Deferred taxes
Adjusting (Journal) Entries
Entries made to adjust the balances of asset and liability accounts to reflect changes in their values due to the passage of time or another implicit transaction.
what is the IS GAAP and IFRS take on an assets value to increase after loss on impairment has been recognized? i.e. the assets been repaired
GAAP - does not alow the value to be written back up once it has been impaired IFRS - will allow the revaluation of certain assets
how to calculate allowance for credit losses
Gross Loans Receivables − Estimated Collectible Receivables = Allowance for Credit Losses
Suppose customers collectively owed MF $120.0 million on 12/31/2020. As reported on the balance sheet, MF only expected to collect $83.6 million on that date. What was the implied allowance for credit losses as of 12/31/2020?
Gross Loans Receivables − Estimated Collectible Receivables = Allowance for Credit Losses $120.0M − $83.6M = $36.4M
how to calculate the value the company expects to receive from credit customers (borrowers)
Gross Receivables − Allowance for Credit Losses = Estimated Collectible Receivables
Tax Expense Formula
Income Before Taxes x Tax Rate
Long-Lived Non-Physical Assets are also known as ___________
Intangible assets
Examples of period costs
Selling, General & Administrative Expense Head Office Depreciation Office Rental Sales Staff Salary Head Office Utilities Advertising Expense Admin Office Supplies R&D Cost Sales Commissions
Taxes Payable Formula
Taxable Income from the tax return x Tax Rate
When is a deferred tax asset created?
Taxable Income is greater than Income Before Taxes due to a temporary timing difference
When is a deferred tax liability created?
Taxable Income is less than Income Before Taxes due to a temporary timing difference
Which of the following is the amount of the tax liability that pertains to the current period and is payable in the next 12 months?
Taxes Payable is the tax liability due in the current period.
ending balance of Inventory
The ending balance of Raw Materials + The ending balance of WIP + The ending balance of Finished Goods = Total Inventory
Implicit Transactions
Transactions that do not involve a specific triggering activity, event, or exchange of resources from one party to another, - are not accompanied by an invoice or other paper documentation. - represent changes in value related to the passage of time, such as depreciation, interest expense, and the amortization of a prepaid expense. - recorded using adjusting journal entries.
contra accounts
accounts that have a balance that is opposite of the balance in the related account
salvage value
amount the business expects to receive after the asset's useful life is over
Bad Debt Expense
an expense account to record losses from extending credit
useful life
business' estimate of how long the asset will provide a benefit
how can you get a quick feel for how old the assets of the business are?
by looking at the relationship between the gross value or original cost of the assets, and the value of the accumulated depreciation account.
how to calculate bad debt expense (confused)
credit agreement - amount expected to collect = allowance for credit losses
journal entry to record depreciation
debit depreciation expense, credit accumulated depreciation
deferred taxes calculations
difference between Tax Expense and Taxes Payable due to a temporary timing difference
examples of product costs
direct materials direct labor manufacturing overhead Packaging Materials Cost Plant Manager Salary Factory rental Manufacturing Utilities Manufacturing Equipment Depreciation Equipment Maintenance
exception to amortization rule
goodwill is not amortized, but rather is tested for impairment at least annually
____ is an exception to the depreciation rule
land bc the value does not decrease as it is used
accounting for a credit agreement
loan issuance - debit loans receivable - credit cash - debit bad debt expense - credit allowance for credit loss loan collection - debit cash - credit loans receivable write off - debit allowance for credit loss - credit loans receivable
deferred taxes exist because of the ____________ principle
matching
Depreciation expense
nominal, income statement expense account, which resets every period and simply shows the expense recognized in that period.
examples of intangible assets
patents, brands, trademarks, copyrights, franchises, and goodwill
Accumulated depreciation
real account that holds the cumulative balance of all depreciation expense recognized against the asset.
double declining balance depreciation
recognizes more depreciation expense in the early years and less in the later years compared to straight-line depreciation.
straight-lined depreciation
recognizes the expense for the asset in equal portions over the time period that the business expects to use the asset
matching principle requires that we match the tax expense for a given period with the ________ and other _______ for that period, as they are shown on the financial statements
revenue; expenses
Tax Expense
tax that relates to activity that occurred during the current accounting period
Taxes Payable
the amount of taxes you actually owe based on what the government says you owe
Credit Risk
the probability that the borrower will fail to pay some of the interest or principal
Accurals
transactions where cash changes hands after revenue or expense is recognized
deferrals
transactions where cash changes hands before revenue or expense is recorded.
Straight-line depreciation is calculation
yearly depreciation = (gross book value - salvage value)/ useful life
