The Accounting Game
Terms
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- expenses
-
costs of doing business
other than those related to producing your product - income statement is like
- a blow up of how we got to our earnings
- notes payable v. accounts payable
-
receive cash (due in long term maybe several years). generally has interest
goods or services (due in short-term maybe 30 days) - what makes an expense an asset
-
when we pay in advance AND
it has value INTO future accounting periods
i.e. 3 year insurance - accrual method
-
we account for purchases when they happen OR
when we owe them NOT
when we pay for them - cash method
- you account only when you give or receive cash
- cost of services
- costs directly related to providing a service
- FIFO
-
HIGH
ending inventory
net profit
LOW
COG - LIFO
-
HIGH
COG
LOW
ending inventory
net profit - LIFO only chosen to
- save taxes
- capitalizing the asset
-
when you buy an asset and add it to the balance sheet
i.e. land and lemonade stand - why can't we expense land and stand?
-
it is a major purchase of significant VALUE with a LONG life
it increases your assets - when you capitalize an asset (i.e. sink) by charging it, where does it show
-
balance sheet only.
not on income statement as expense because it is an asset
not on cash statement because you charged it. - should we expense or capitalize an item?
-
TIME something that lasts longer than a year
COST greater than certain amount. i.e. $500, $1000.
i.e. trash can lasts longer than year but not capitalized - net book value of a fixed asset
-
purchase price minus depreciation
i.e. $11 for stand and sink after $1 depreciation - depreciation is a
- non-cash expense
- advantages of depreciation
- reduces EARNINGS and TAXES w/o reducing CASH
- equipment
-
a fixed asset that's movable
i.e. red wagon - earnings are NOT
-
cash
tied up as assets, inventory, equipment - what runs business on a daily basis
- cash, not profits
- 4 types of current assets
-
cash
A/R
inventory
prepaid expenses - current assets are
- most likely converted to cash within a year
- assets are organized
- in descending order of liquidity
- liquidity
- how quickly something can be converted to cash