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The Accounting Game


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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
ending inventory
net profit


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
a fixed asset that's movable

i.e. red wagon
earnings are NOT

tied up as assets, inventory, equipment
what runs business on a daily basis
cash, not profits
4 types of current assets
prepaid expenses
current assets are
most likely converted to cash within a year
assets are organized
in descending order of liquidity
how quickly something can be converted to cash

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