Basic Accounting Knowledge
What is the Accounting Equation?
Assets = Liabilities + Stockholders Equity
What is the normal balance of an account?
The side that increases the account. Debit Assets and Credit Liabilities.
A company's Assets increased by $100, and its Liabilities decreased by $50. What is the stockholders' Equity?
$150
What is Adjustment used for?
We use adjusting entries to ensure that revenues and expenses are recorded in the correct accounting period, and that assets and liabilities reflect their true balances at the end of the period. This helps comply with the matching principle and accrual basis of accounting.
I booked a flight with Delta in October 2024 and then flew to my destination in April 2025. When does Delta recognize revenue?
In April 2025
How do you calculate Total Assets
Total Assets (Adjusted) - Contra Assets (Adjusted)= Total Asset value
A company buys $1,000 worth of inventory. What is the Journal Entry needed?
Debit Inventory: $1000
Credit Cash: $1,000
A company starts the year with $50 in cash and ends the year with $45 in cash. Their operating activities produced $100; Financing Produced $400. What is the value of investing? What can you infer about this company?
They spent $505 on investing activities.
They're probably in their start-up phase.
A truck was purchased for $80,000 and has a useful life of 10 years. It's expected to be worth $12,000 at the end of its life. What is the yearly depreciation, and what is it used to determine?
$6,800, which will give us the book value of the asset.
Why do companies offer discounts?
Because A/R is risky, and the sooner you get paid back, the better. Even if you lose a little bit of revenue in the process.
How would an investor determine how profitable a company is?
By looking at Earnings Per Share
A company sells $1,000 of inventory for $2,500. What is that journal entry?
Debit Cash: $2,500
Credit Revenue: $2,500
Debit COGS: $1,000
Credit Revenue: $1,000
What's an example of Operating, investing, and financing activities
Operating: Selling goods
Investing: Buying equipment
Financing: Taking out a loan.
A company purchased $15,000 worth of prepaid rent on September 1, 2024, and it is currently December 31, 2024. What is the adjusting journal entry needed for prepaid rent?
Debit Rent expense: $5,000
Credt Prepaid Rent: $5,000
Company A initiates a b2b transaction with Company B for a total of $5,000 on April 6th. Company B offers a 4/15 n30 discount for Company A. They pay on April 15th. What does Company A pay?
$4,800
How do you calculate Retained Earnings, and when do you calculate them?
Calculated at the end of the period
A company purchased inventory from another company for $500 with credit terms of 2/10, n/30. What is the journal entry needed for this transaction when the company pays it back?
Dr. Accounts payable $500
Cr. Inventory: $10
Cr: Cash $490
What's my favourite colour?
Hesperidium.... (It's orange)
On December 28, you completed a $3,500 consulting job for a client, but you forgot to send the invoice before year-end. You plan to send the invoice in early January.
The company uses the accrual basis of accounting and prepares monthly financial statements.
December 31 Adjusting Entry (to recognize earned revenue):
You earned the revenue, so it must be recorded in this period, even if unbilled:
In December
Dr. Accounts Receivable: $3,500
Cr. Service Revenue: $3,500
In January
Dr. Cash: $3,500
Cr. Accounts Recievable
Crimson Corp had $250,000 in credit sales during the year. Based on past experience, management estimates that 3% of credit sales will be uncollectible.
What is the bad debt expense for the year?
What is the journal entry to record the bad debt expense?
If the Allowance for Doubtful Accounts had a credit balance of $2,000 before the adjusting entry, what is the ending balance in the Allowance account?
Bad debt expense is $7,500
Debt Bad Debt Expense: $7,500
Credit Allowance for Doubtful Accounts $7,500
Total Allowance for doubtful accounts is $9,500 (credit)
How do you calculate Net Realizable value A/R? Why do you do it?
Accounts Receivable - Allowance for doubtful accounts = Net Realizable Value
The Matching Principle says you should calculate expenses when recording revenues. Allowance for doubtful accounts is an expense that is associated with accounts receivable.
A company sells $10,000 of inventory to another company for $15,000 on credit. The company then returns $3,000 of that sale, which was $1000 of inventory, as it seems reasonable. Record the series of journal entries.
Dr Accounts receivable: $15,000
Cr Revenue: $15,000
Debit: Cogs: $10,000
Credit Inventory: $10,000
Return:
Dr sales Return Allowance: $3,000
Credit: Accounts receivable: $3,000
Debit Inventory: $1,000
Credit: COGS: $1,000
How does a $50,000 depreciation expense affect the statement of cash flows?
It's added back to the cash because it's a noncash expense.
A tractor is purchased for $25,000 and has a useful life of six years. It's expected to be worth $2,000 at the end of its useful life. What adjusting journal entry needs to be made at 3 years and 4 months?
Debit Depreciation Expense: $12,777,78
Credit Accumulated Depreciation: $12,777.78
Year 1:
NovaTech Inc. is a brand-new business. They made $100,000 in credit sales and, with no prior data, conservatively estimated that 2% would be uncollectible.
They recorded that estimate at year-end.
But by the end of the year, $5,000 of customer accounts actually became uncollectible and were written off.
Year 2:
In Year 2, NovaTech expects credit sales of $120,000, and after learning from last year’s experience, they now estimate 4% of sales will be uncollectible.
What was NovaTech’s Year 1 bad debt expense and journal entry?
What is the balance in Allowance for Doubtful Accounts at the end of Year 1?
What is the Year 2 bad debt expense and adjusting journal entry?
Year 1
Debit Bad Debt Expense: $2,000
Credit Allowance for Doubtful accounts: $2,000
Debit Allowance for doubtful accounts: $5,000
Credit A/R: $5,000
Year 2
Debit Bad Debt Expense: $7,800
Credit Allowance for Dountful accounts $7,800