journal entry Archives - Accounting Instruction, Help, & How To (Financial & Managerial)

Cash Flow Category Thought Process

Written by Bob Steele CPA - Accounting Instruction, Help & How To on August 5th, 2020. Leave a comment

In this presentation, we will think about the thought process to know which category a cash flow should be entered into whether it should be operating, investing or financing activity. When putting together the statement of cash flows, we’re usually going to have a worksheet, which will typically have a comparison of balance sheet accounts. And we also might just have test questions that will ask us, where should this cash flow go? And that’s going to be a common kind of question that we’re going to have whether we build the entire cash flow statement from scratch, or whether we’re just asking test test questions and trying to know what types of Cash Flows we’re talking about. It’s also important for practice as well so that we can understand when we’re thinking about cash flows, where do they belong? What are these cash flows mean? What are they doing for us? What are they doing for the company? Are they part of the operations? Are they part of investing? Are they part of financing? If we look at a worksheet like this to build the statement of cash flow, typically we’re going to look at a balance sheet for two periods. So here our balance sheet for these two periods. And we’ll have the difference between the two periods in terms of the balance for these balance sheet accounts. So we’ve got cash, accounts receivable, inventory, prepaid expenses.

01:13

Now what we’re going to do is we’re going to take the change in cash, that’s going to be the end result on our statement of cash flows. And we’re going to kind of back in to that end result by looking at the change in the other balance sheet accounts and tried to figure out what’s causing this change. So we’re going to go through all the other balance sheet accounts, look through these changes. And we know that if we look if we add them all up, they add up to zero. Why? Because the debits and credits for one year, add up to zero the debits and credits for the other year add up to zero. In other words, the debits minus the credits equals zero. And therefore the difference between the two years debits and credits the change will add up to zero. So we know that’s the case and we know that if we add up then everything except cash Then the result will be the difference in cash. So that’s how we’re going to kind of work and put together our statement of cash flows. So what we need to do then is we’re going to take a look at these changes in receivables, changes in inventory changes in prepaid expenses, and then try to determine where does that change belong? Before we get into any other question is, is the change of inventory and operating, investing or financing activity? And is the change in long term notes payable? Is that going to be an operating investing or financing activity? Our goal here is to go through a thought process to see if we can think through more clearly which category these these should be belong to. So what’s the most common journal entry in this account? It’s going to be our first question.

02:48

Whatever account they’re given us here, we’re going to say it let’s think about the most common journal entry that’s related to this account, there’s typically going to be one or two journal entries that are going to be very common and we want just right down first, once we know the most common journal entry, then we’re going to ask is an income statement account involved? So when we think about whatever account we’re dealing with, we’d write down the journal entry and say, Okay, is there an income statement account involved? Is there a revenue account or an expense account involved? If the answer is yes, then it’s probably the change that we’re dealing with is probably something that should be in the operating activities. Because remember, the operating activities is kind of like the income statement on a cash basis. So if we’re dealing with something that’s this change has something to do with the income statement, then it’s going to be something on the operating activities. Typically, if the journal entry has nothing to do with the income statement, there’s no revenue or expense accounts involved in the normal journal entries related to these accounts, then we’re going to ask the question, are we purchasing or selling an asset? Because it’s so if it’s not operating, this means that it’s not operating therefore, We’re trying to see if it’s going to be investing activity. And that typically means we’re purchasing or selling an asset. If it has to do with, for example, property, plant and equipment, or some other type of investment, then it’s going to be an investing activity. And then if it’s not, then it’s going to be financing. And of course, financing is going to be dealing with notes, something that we’re dealing with that doesn’t deal with operating activities in terms of the income statement, no revenue and expenses, and typically doesn’t have assets involved either, because what we’re doing is funding the company. So that’s typically going to be something that deals with cash and subtype of liability or the equity section. So this is going to be our thought process if we go through each of those line items, and think about each account on the balance sheet.

04:46

And then try to go through this thought process and think okay, which category are we going to be putting this change to? Now, this looks a little less intuitive than we might think at first glance here because no one We’re doing we’re looking at the balance sheet accounts. And we’re trying to see what category these things are going to fit into. And remember that the operating activities I’m keep on comparing that to the income statement. And you might be thinking, well, these are all balance sheet accounts. Why do you keep mentioning the income statement. And note, what we’re doing here is we’re really kind of backing into the activity is happening by looking at the change in two points in time. So we’re kind of still looking at the income statement activity type of accounts, we’re looking at change, we’re looking at activity, even though we’re doing that by looking at the change in two points in time to balance sheet accounts, which are points in time. So when we look at the change in accounts receivable for example, if we go through our thought process, we’re going to say okay, accounts receivable was at 80,007 50. In the prior year, end of the current year, it’s at 77,100.

05:51

That means it went down by 3650. So our goal here is just to determine which category That change belongs to it’s an operating, investing or financing. And if we think about that, then we could think Well, what’s the normal journal entry related to accounts receivable? We’re going to have a debit to accounts receivable and a credit to sales. That’s going to be our normal journal entry that we’ll have related to accounts receivable. And we can see there that sales is an income statement account. So we know that it is an income statement account involved, we’re going to say yes, therefore, it’s an operating activity. So note what we’re doing here, we’re looking at the change in a balance sheet account. We’re looking at the change in the balance sheet account, then ask yourself, what’s the normal journal entry related to this account? And if we think about the normal journal entry related to accounts receivable, that’s a sale of something on account. So accounts receivable goes up when we make a sale on account, and we credit revenue and revenue is clearly an income statement account. So this Change, then that’s what we’re going to think through, we’re going to say that change looks like it belongs somewhere in the operating activities. Because we’re dealing, we’re really kind of backing into sales. That’s what we’re really looking at. And we’re going to do that by writing down the journal entry. Let’s look at another account. We’re going to pick equipment now. So we’re just going to go through all these changes. And we just got to find a home for all these changes.

07:21

When we when we make the statement of cash flows. We got to find a home for them in either operating, investing or financing. And we’ll end up with the change in cash, which is kind of like the bottom line. The bottom line will be cashed at the end of the day. So we’re going to find a home for the equipment. Where’s that going to go that change? Well, if we think about the journal entry for equipment, then if we buy equipment, we’re going to debit equipment, and credit cash and possibly credit like a note payable, some type of financing. But if we pay cash for it, this would be the most simplified journal entry. Even if we had a note there’d be no Part of it that would be on the income statement, one asset went up, the other asset is going down. So therefore, is the is an income statement account involved? No. So we’re purchasing or weren’t, so it’s not going to be an operating activity. And then the next question is, are we purchasing or selling an asset? In this case, yeah, we’re purchasing an asset. And that means that it’s going to be an investing activity. So and this was the confusing thing for me when I first started learning this thing, because investing activities, I had a different conception of what investing is to invest in something like any asset any anything we purchase in the business that we’re not consuming now is an investment to the future. In terms of the cash flow statement, we’re trying to spend our cash in order to put our money somewhere that’s going to help us make money in the future. That’s going to be some type of investment. So in this case, it’s going to be an investing activity.

Bond Retirement

Written by Bob Steele CPA - Accounting Instruction, Help & How To on July 30th, 2020. Leave a comment

In this presentation, we will discuss the journal entries related to the retirement of bonds. the retirement of bonds just means that we’re going to pay off the bonds in some form or another at some time or another, meaning the bonds are going to go away. Typically, that’ll happen at the maturity date at the end of the bond. So for example, if we have a bond on these terms, with the face amount of 240, the issue price of 198 for 80, for 15 year bonds, they’re going to be semi annual. What would happen is when we put this on the books, we would put it on the books as cash we got for the 198, the bond payable on the books for 240, and then a discount. And then of course, over the life of the bond, we would be paying interest for that 15 year time period two times that’s 30 payments. And then at the end of this we would also be be amortizing out the discount to get rid of it, to make it go away to the interest and then By the end of this time period, the discount would be zero. And we would only be left with a bond on the books. In other words, at the maturity date, we would have something like this on our trial balance, the discount is now zero. And the bond is on the books at 240, which is the face amount of the bond, if it were a premium, it would be it would be the same in that we would be left with just the bond amount and the premium would be gone to zero. And now it’s just like anything else that we don’t have to deal with interest at this point or anything else, we just need to close out the bond. And so it’s just like any other liability, we’re just going to pay at the maturity date. That’s how we’re going to retire it. So this is a 240 credit, we’re going to make it go down by doing the opposite thing to it a debit, and we’re going to pay cash, cash is a debit balance, we need to make it go down. So we’re going to credit cash. So this is going to be our journal entry. We’ll debit the bond make go away, and then we’ll pay off the cash. When we post this then the bond payable will be here. Here, it’s going to go it’s a credit, we’re going to debit it, making it go away to zero, and then the cash has a debit balance, we’re going to credit it making the cash go down. So it’s a pretty straightforward journal entry.

02:12

The only confusing thing about this journal entry is that it happens at the end of the bond term. So when we’re talking about book questions, we often don’t get asked it because usually we’re concentrating on how to calculate the interest how to calculate the face amount of the bond, how to record the bond, how to amortize the the bond, discount or premium. And we don’t really typically get all the way to the end of the bond, the retirement the maturity date, to record the end transaction oftentimes, and it’s a pretty easy transaction if we were to do so. And it’s a lot easier to if we can actually see the trial balance. When you see the trial balance, you say, oh, there’s a liability there. We’re going to pay it just like we would if it were note payable at this time. It needs to go down and then we’re going to pay it off with cash. Now it is possible for us To have a callable bond that we’re going to retire before the end of the bond date before the maturity date. So in other words, in this case, we have the bond on the books of 240,000. And we have the discount of 338 748. And therefore, if we were to calculate the carrying amount, we’d have 240,000 minus 238 748, or two a one 252. This 201 252 is the carrying amount of this bond payable. This is something that we owe in the future. If we can pay it off at this point in time for some cash that’s going to be less than this amount, then we’re going to have a gain resulting in a gain. And if we are paying it off early for something more than this, we’re going to have a loss. So let’s see what that’s going to look like.

03:52

The gain or loss can be confusing here. When we’re talking about a bond. It’s easier to get to that point by just doing the journaling So if we have all this information, especially if we have the trial balance, because then we can see what accounts are debited and credited on the trial balance or which accounts have a debit or credit balance, then it’s a lot easier for us to construct the journal entry. So the first is going to be given to us, we’re going to say that the cash that we’re paying is 230,000. That’s gonna have to just be given in the problem because that’s the callable price that’s how much we’re able to purchase these bonds for. So cash is going to go down because remember, we are buying them back basically, or we’re we’re paying them off early before the maturity date. So it’s going to be 230. Then we’re going to say that the bond payable has to go off the books. Now the bond payables on the books at 240,000, we can see it’s a liability, it has a credit balance. So to take it off the books, we do the opposite thing to it, a debit for whatever it needs to be to make it go to zero, the discount. Same thing we need to do whatever we need to do to make it go to zero because it’s Gotta go away. So when we construct the journal entry, we just know that we just got to do whatever we need to do to make it go to zero. If you have a trial balance in front of you, that’s easy to do, because we can see the discounts on the books at a debit. And we need to do the opposite to make it go down, which is a credit. If you’re looking at a book problem that doesn’t give you a trial balance, and just tells you that the bond is on the books at a discount, then you got to think through it. And one way to think through it might be to say, well, the bonds is a liability, it must be a credit, that discount means that we’re making the bond go down, because it must be decreasing, we’re having it less than the state, the face amount, the sticker price.

05:40

And since it’s a credit, the thing that makes a credit go down would be a debit. So that discount must be a debit because these two are really combined together. And a discount means that we we really the net of the two are below the face amount price, so this must be a debit. So if it were a premium, then this amount be increasing or greater than the face amount, and it would be a credit normal balance. Once we know that this is a, this is a debit normal balance for a discount, then we can do the opposite thing to it to credit it to make it go down. And then of course, we just need to figure out what the difference is we’ve got credits of 230,038 748 minus the 240. Debit means we need a 28 748 debit. And that of course, in this case, I’m going to say it’s a gain loss account here because it could have gone either way. But if it’s a debit here, then it’s on the income statement. That’s going to be a loss. And you just got to basically start to be able to recognize that why would that be a loss? Well, you can think through that. We paid 230 versus the carrying value, or you can also just think well, if it’s a debit on the income statement, It’s acting more like an expense, meaning expenses have debit balances, they go up in the debit direction, and they bring net income down.

07:08

Revenue has a credit balance, it brings net income up. This is acting like a, an expense because it’s a debit balance. If we debit the income statement, it’s going to make net income go down, that means it must be a loss rather than a gain, which we would think would make net income go up. So the other way we can think about this is to is remember, the carrying value is going to be the 240,000 minus the 38 748. So this is kind of a value that we owe on the bond. And it’s a liability, that’s kind of the value we owe and we paid more than the value that we owe. So that’s going to be a loss in this case. And that’s another way you can think through it being a loss. So if we post this out, then we’re going to say that the gain or loss 28 748 Here, making the income statement accounts go up, kind of like an expense bringing net income down. The bond payable will be posted here, it’s going to make the bond payable go to zero. That’s why we are retiring. It’s making it go away. And then we’ve got the discount, it’s going to make the discount go to zero because we’re retiring it as well. And then the cash is going to be here, cash is going to go down. So there’s going to be our transaction. We have the bond payable and discount going away which has to be the case if we’re retiring the bonds. The cash is going down for the early retirement. And we resulted in a loss in order for us to be able to retire the bonds early.

Petty Cash

Written by Bob Steele CPA - Accounting Instruction, Help & How To on July 11th, 2020. Leave a comment

In this presentation we will talk about how to set up and record a petty cash fund. Setting up a petty cash fund seems like an easy thing to do to have a minimal amount of cash that we can have expenditures for small purchases for however, it can be a little bit tricky to set up the petty cash fund and there is kind of a shortcut to recording transactions for the petty cash fund. So we’ll go over the process of setting up the petty cash fund recording the initial investment in the petty cash fund and then recording the activity from the petty cash fund. Now the objective of course in this will be to have not just the checking account where we need authorization in order to take money out of the checking account, we would typically want anything going out of the checking account to be by electronic fund transfer or by cheque so that we have a clear paper trail of what is going on the petty cash However, if we just have some small items that we need to take care of with cash and as to convenient to have small items with cash to be paid.

Average Inventory Method Explained

Written by Bob Steele CPA - Accounting Instruction, Help & How To on July 3rd, 2020. Leave a comment

Hello in this lecture we’re going to be talking about the average inventory cost method we will be selling our coffee mugs again we will not be using a specific identification but rather a cost flow assumption VAT assumption being the average method, we will be using the same worksheet I highly recommend working on a worksheet such as this when when doing any cost flow assumption for inventory, which will include a purchases section, a cost of merchandise section and an ending inventory section in which pieces we can then calculate the unit cost times the quantity to give the total cost for each of the sections. This can answer the most amount of questions that can be asked for this top. If we take a look at a trial balance, we can see that the inventory on the trial balance is at 5000.

Last In First Out LIFO Inventory Method Explained

Written by Bob Steele CPA - Accounting Instruction, Help & How To on July 2nd, 2020. Leave a comment

Hello in this lecture we’re gonna be talking about the lastin first out inventory method, we will once again be selling our coffee mugs. Here, we will not be specifically identifying the coffee mugs that we sell, but rather using a cost flow method, that method been a lastin. First out this time, whenever doing a cost flow method, I do recommend setting up a worksheet such as this with three parts to it having the purchases, the cost of the merchandise and the ending inventory, and then calculating the units that we’re going to sell the unit cost and the total cost for those particular categories. As we will do here. This will answer the most amount of questions in any format that those questions could be asked. What we are trying to do here is of course, say that the inventory that is reported on the trial balance needs to be backed up in terms of a worksheet Why? Because on the trial balance, it’s reported in terms of dollars.

First In First Out FIFO Explained

Written by Bob Steele CPA - Accounting Instruction, Help & How To on July 1st, 2020. Leave a comment

Hello in this lecture we’re going to be taking a look at first in first out inventory method, we will be selling coffee mugs and we won’t be specifically identifying the coffee mugs. In this case, as we’ve talked about in a prior lecture of this time, we’re going to be using a cost flow assumption VAT cost flow assumption being the first in first out assumption this time to set up this problem in any cost flow assumption, I highly recommend putting together a worksheet that worksheet including headers of purchases columns, and then we got the cost of merchandise columns, then we have the ending inventory. I highly recommend setting up a worksheet like this, whether it’s by hand or in a computer or in Excel because it answers all the types of questions that could come up with an inventory cost flow type of assumption within those sections, we will then have the quantity and then the unit cost and the total cost we’re gonna have, if we sell something, we’re calculating the cost of that sale.

Weighted Average Periodic System

Written by Bob Steele CPA - Accounting Instruction, Help & How To on June 30th, 2020. Leave a comment

In this presentation we will discuss the weighted average inventory method using a periodic system. The weighted average method as opposed to a first in first out or last In First Out method, the periodic system as opposed to a perpetual system. We want to keep the other systems in mind as we work through this comparing and contrasting. We’re going to be working with this worksheet entering this information here. It’s important to note that this worksheet is a worksheet that can typically be used with any of these inventory flow type problems of which there are many. We have first out last in first out the average method. And then we have a perpetual and periodic system which can be used with any of those methods. It’s also possible for questions to ask for just one component such as cost of goods sold or Indian inventory, and therefore it can seem like there’s more types of problems that we can have in that format as well. If we set up everything in a standard way, even if that weighs a little bit longer for some types of problems, it may be easier because we can just memorize that one format to set things up, this would be a format to do that.

Perpetual & Periodic Inventory Systems

Written by Bob Steele CPA - Accounting Instruction, Help & How To on June 26th, 2020. Leave a comment

In this presentation, we will compare and contrast the perpetual and periodic inventory systems as we track inventory through the accounting process. First, we’re going to look at the perpetual system, the system we typically think of when recording transactions that deal with inventory. So if a transaction doesn’t say it’s using a periodic or perpetual system, you probably want to default to the perpetual system. We have here the owner, we have the customer, we’re saying that we’re selling this inventory this Inc for a cost of 8450. To the customer, the customer is not paying cash but pain, an IOU to the owner. Typically, under a perpetual system. We break this out into two components one, the IOU, or the accounts receivable or sales component. The component similar to what would be seen if we were not selling merchandise but a service company.

Cash Payments Journal Service Company 50

Written by Bob Steele CPA - Accounting Instruction, Help & How To on June 19th, 2020. Leave a comment

In this presentation, we will take a look at a cash payments journal for a service company, the cash payment journal we’ll be dealing with transactions where we have cash payments, that’s going to be the factor that will be the same for all transactions with cash payments meaning this column here cash payments will always be affected wish they kept cash payments journal cash payments journal will be used when using more of a manual system rather than an automated system. However, it’s good to know what the cash payments journal is, even if using an automated system because it’s possible that we or it’s very likely that we would need to run reports that will be similar in format to a cash payments journal. And it’s useful to see this format or how different types of accounting structures can be built.

Cash Receipts Journal 40

Written by Bob Steele CPA - Accounting Instruction, Help & How To on June 18th, 2020. Leave a comment

In this presentation we will talk about the cash receipts journal. The cash receipts journal will be used when we have cash receipts when using a more of a manual system or a data input system that we will be doing by hand as opposed to an automated system. It’s still useful to know the cash receipts journal if using an automated system for a few different reasons. One is that we might want to generate reports from an automated system, similar to what we would be creating in a manual system for a cash receipts journal. And to it’s just a good idea to have different types of systems in mind, so we can see what’s the same and what is different between different accounting systems. The cash receipts journal will be used for every time we have a cash receipts. So the thing that transaction triggering a cash receipt will be when cash is being used. And we’re going to have a little bit more complex complexity in a cash receipts journal than something like a sales journal because we may be receiving cash for multiple different things.