If the account Loss from Property Damage ends up with a debit balance, that will be the amount of the loss. If the account has a credit balance, there is actually a gain on the property damage.

Some liabilities have low interest rates and some have no interest associated with them. For example, some of a company’s accounts payable may allow payment in 30 days. With those payables it is better to have the liability and to keep your cash in the bank until they become due.

In our personal lives, our first house was probably purchased with a downpayment and mortgage loan. That mortgage loan was a big liability, but it allowed us to upgrade our living space. I viewed my mortgage loan liability as a good thing because it allowed me to own a nice home in a beautiful neighborhood.

So some liabilities are good—especially the ones that have a very low interest rate. Too many liabilities could cause financial hardships.

Learn more about the Balance Sheet.

In both of the transactions the company pays cash at the time of the transaction. In each of the transactions the Cash account is credited. Therefore, each transaction will require a debit to another account. (Recall that double entry bookkeeping requires at least one debit and one credit when recording a transacton.)

In the first transaction, the debit will be to a long term asset account such as Delivery Vehicles. In this transaction the asset Delivery Vehicles was increased with a debit and the asset Cash was decreased with a credit. The accounting equation (A=L+OE) remains in balance because one asset increased by $25,000 and one asset decreased by $25,000.

In the second transaction, the debit will be to Rent Expense since the amount will be used up in the current accounting period. (If the amount was a prepayment of a future period’s rent, the amount would have been debited to the asset account Prepaid Rent.) Since Rent Expense reduces net income, it  also reduces owner’s or stockholders’ equity, which normally have credit balances. The accounting equation will show assets decreasing by the reduction in cash and owner’s or stockholders’ equity decreasing because of the expense.

The asset Delivery Vehicle is an asset, but will become Depreciation Expense over the life of the vehicle. The rent is an immediate expense because there is no future accounting period benefiting from the current month’s rent.

See more examples under Accounting Equation.

To illustrate, let’s assume that the sales tax rate is 7%. An item that is subject to the sales tax was sold for a total amount of $481.50 including sales tax. We can express this total amount as the [selling price before sales tax] + [the sales tax on the amount before sales tax] = the total amount. Algebraically it would be: Let S = the selling price before sales tax.  S+0.07S=$481.50;  1.07S=$481.50; S=$481.50 divided by 1.07; S=$450.00. The proof is selling price of $450 + the sales tax of $31.50 ($450 X 0.07) = $481.50. 

Let’s try another example. If the total amount including a 7% sales tax is $32,100 what is the actual sales and what is the sales tax? $32,100 divided by 1.07 = $30,000 the true sales amount. The sales tax payable will be 0.07 X $30,000 = $2,100. In general journal form it will be: debit Cash $32,100; credit Sales $30,000; credit Sales Tax Payable $2,100.

A depositor will earn more interest on a certificate of deposit than the amount earned on a savings account or money market account. The length of a certificate of deposit could be one month, three months, six months, one year, 17 months, three years, etc. Generally the longer the time until maturity, the higher the interest rate.

A CD that matures in less than one year will be reported by the bank as a current liability, and will be reported as a short-term investment by the depositor (provided the amount is not restricted by the depositor).

The reason lies in the definition of contribution margin: selling price minus the variable costs and expenses. Once the contribution margins have covered the total amount of fixed costs and expenses, the entire contribution margin on the next units will go to profit.

Learn more about Breakeven Point.

The closing entry or entries will also include 4) a credit to each expense account that has a debit balance, 5) a credit to each loss account, and 6) a credit to each contra revenue account such as sales returns and allowances. The amount of each credit entered will be the amount of the debit balance in each account.

If the debits to the revenue, gain, and contra expense accounts have a total that is greater than the closing entry credits to the expense, loss, and contra revenue accounts, the corporation had a positive net income. The net income amount will be credited to Retained Earnings, either directly or through an Income Summary account.

Let’s illustrate this with some numbers. Assume that the revenue, gain, and contra expense accounts had credit balances totalling $600,000; and the expense, loss, and contra revenue accounts had debit balances that totalled $530,000. This will require closing entries resulting in $600,000 of debit amounts, $530,000 of credit amounts, and a $70,000 credit to Retained Earnings. If the expenses and losses were greater than the revenues and gains, there will be a debit to Retained Earnings.

The purpose of the closing entries is to end up with a zero balance in every temporary account before starting the next accounting year.

A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.

The charge, decrease, or reduction is likely called a debit memo because the checking account balance is a liability on the bank’s books. This is the case because the bank has your money as one of its assets and it has your account balance as one of its liabilities. When the bank decreases your account balance, it is reducing its liability. Liabilities are reduced with a debit entry. That also explains why the bank credits your account when your account balance is increased.

Learn more about Bank Reconciliation.

If you purchase an asset and the sales tax is required, the sales tax should be recorded as part of the cost of the goods or services received. For example, if you were required to pay sales tax on the new company car, the cost of the car will include the sales tax. If you purchased supplies and the cost of the supplies was subject to sales tax, the sales tax is part of the cost of the supplies. If you received services that were subject to the sales tax, the sales tax is a necessary part of the cost of the services.

If your state does not allow an exemption from sales tax for the asset you purchased, the sales tax should be recorded as part of the cost of the asset.

Prior to 1988, accountants prepared a funds flow statement. Generally, the funds flow statement reported on the change in working capital from one balance sheet date to another.

Read AccountingCoach.com’s explanation of the cash flow statement.

The liability account Notes Payable reports the principal amount owed at the time. Interest that will occur in the future is not recorded at the time of the purchase. The reason is that the interest is not owed as of that date. Each month, one month’s interest on the note or loan will be recorded with a debit to Interest Expense and a credit to Cash or Interest Payable (if not paid). Any cash payments that exceed the amount of interest owed at that time will be debited to Notes Payable. The balance in the liability account Notes Payable should agree with the principal balance owed to lender. The balance in the liability account Interest Payable should agree with the interest due as of that date.

You can call your lender to verify the amount of principal and interest owed at a specific date and then compare the amounts to the balances in your general ledger accounts.

From an accounting standpoint, the par value of an issued share of common stock must be recorded in an account separate from the amount received over and above the amount of par value. For example, if a corporation issues 100 new shares of its common stock for a total of $2,000 and the stock’s par value is $1 per share, the accounting entry is a debit to Cash for $2,000 and a credit to Common Stock—Par $100, and a credit to Paid-in Capital in Excess of Par for $1,900. In total the Cash account increased by $2,000 and the paid-in capital reported under stockholders’ equity increased by a total of $2,000 ($100 +$1,900).

If a corporation is not required to have a par value or a stated value and the corporation issues 100 shares for $2,000, then the accounting entry will be a debit to Cash for $2,000 and a credit to Common Stock for $2,000.

In other words, when the issued stock has a par value, the proceeds from the issuance gets divided between two of the paid-in capital accounts within stockholders’ equity. If the issued stock does not have a par value, the proceeds from the issuance goes into just one paid-in capital account within stockholders’ equity.

Learn more about Stockholders’ Equity.

Payroll taxes which are not withheld from employees are expenses of the employer. Two examples of payroll taxes that are not withheld from employees but which must be remitted to the government by the employer are the employer’s portion of the FICA or Social Security and Medicare taxes and the state and federal unemployment taxes. Since these are to be paid by the employer, these are expenses. They are also liabilities until the employer remits the required amounts to the government.

Learn more about Payroll Accounting.

You can read Statement No. 95 at no cost at www.FASB.org/st.

Let’s illustrate this with an example. Assume that you own a sole proprietorship and you provided a service to a customer. One of your business assets (cash or accounts receivable) increased and your liabilities were not involved. Therefore, your business liabilities will remain the same and your equity in the business will increase.

Accountants prepare an income statement or P&L to report the revenues and expenses, but the ultimate effect is that the business assets and owner’s equity will increase when there is a profit or net income.

Learn more about Accounting Equation.

The term fixed assets generally refers to the long-term, tangible assets used in a business that are classified as property, plant and equipment. Examples of fixed assets are land, buildings, manufacturing equipment, office equipment, furniture, fixtures, and vehicles. Except for land, the fixed assets are depreciated over their useful lives.

Learn more about fixed asset Depreciation.

Here is an example of window dressing. A company operates throughout the year with a negative balance in its general ledger Cash account. (Its balance at the bank is positive due to the time it takes for its checks to clear its bank account.)  Since the financial statements report the Cash amount appearing in its general ledger account, the financial statements would report a negative amount of Cash. However, the company does not want its December 31 balance sheet to report a negative cash balance, since it will be reviewed by many outsiders. To avoid reporting a negative cash balance the company does not make the payments for amounts that should be paid between December 26 and December 31. This postponement of payments allows its book amount of Cash to temporarily be a positive amount. Then on January 2, the company issues checks for all of the amounts that normally would have been paid at the end of December.

If you did not notice the double payment when processing the customer’s remittance, the customer’s accounts receivable record will show a negative amount due for the sales invoice and might even show a negative amount due from the customer. If your company mails statements to its customers, the customer should be able to see its double payment when reviewing the statement.

In some accounting software the chart of accounts may be the means to open new general ledger accounts and to control their position in the financial statements.

Usually the chart of accounts begins with the balance sheet accounts followed by the income statement accounts. The accounts will usually be in the same order as they are presented on the two financial statements.

Learn more about Chart of Accounts and see two examples.

Assume a product has a cost of $75 and a selling price of $100. Since the gross profit is defined as selling price minus the cost of goods sold, this product will have a gross profit of $25 ($100 minus  $75). The gross margin or gross profit percentage is 25% (gross profit of $25 divided by selling price of $100). The mark up of $25 on the cost of $75 equals 33.333% ($25 divided by $75).

Let’s prove this with one more example. Assume you have a product that you purchased for $9. If you mark it up by 33.333%, you will have a mark up of $3 and the product will sell for $12. The income statement will show a sale of $12 minus its cost of $9 for a gross profit of $3. The gross profit of $3 divided by the selling price of $12 equals a 25% gross margin or gross profit percentage or gross profit ratio.

Learn more about Financial Ratios.

Paid in capital, also referred to as contributed capital, is the amount that the corporation received from stockholders when the corporation issued its stock. Paid in capital is also referred to as permanent capital.

Retained earnings is the cumulative amount of after tax net income earned by the corporation since its inception minus the dividends that have been distributed to the stockholders since the corporation began.

Learn more about Stockholders’ Equity.

For example, a company’s sales may have increased 25% during the past year. However, all of the sales increase was the result of having acquired a competitor. Therefore, it had no organic growth.

AccountingCoach.com has a Dictionary of more than 1,000 accounting related terms.

Others use the term gross margin to mean the gross profit as a percentage of net sales. Perhaps the term gross profit margin means the gross profit percentage or the gross margin ratio.

Learn more about the Income Statement by using the free Explanation of the Income Statement.

I recall being asked to reconcile the general ledger account Freight Payable. What I needed to do was provide documentation that the balance in Freight Payable was proper. I proceeded to look at the shipments of recent sales and then determined how much we would be obligated to pay for the freight on those sales. We then adjusted the balance in Freight Payable to my documented amount. This reconciliation was done to have the correct account balance and to provide the outside auditors with documentation which could easily be reviewed.

I also reconciled the balance in Utilities Payable by computing the daily cost of each utility that the company used. The cost per day was then multiplied by the number of days since the last meter reading date shown on the utility bills already entered in our accounting system. We then adjusted the Utilities Payable account balance to be equal to the documented amount.

Learn more about Adjusting Entries and Bank Reconciliation.

For example, if the annual subscription cost is $240 and it is paid in advance, you would initially debit Prepaid Expenses for $240 and credit Cash for $240. If your company issues monthly financial statements, then each month during the subscription period you would debit Subscription Expense for $20 and credit Prepaid Expenses for $20. This results in 1) the matching of $20 to expense on each of the monthly income statements, and 2) the balance sheet reporting the amount that is prepaid or not yet expired.

At a large company, the annual cost of $240 will usually be an immaterial amount. The materiality concept will allow you to violate the matching principle, and to avoid the monthly adjusting entry, by simply debiting Subscription Expense for the entire $240 at the beginning of the one-year subscription period.

Learn more about Adjusting Entries.

On the other hand, the fixed cost per unit will change as the level of volume or activity changes. Using the amounts above, the fixed cost per unit is $2 when the volume is 3,000 units ($6,000 divided by 3,000 units). When the volume is 4,000 units, the fixed cost per unit is $1.50 ($6,000 divided by 4,000 units).

AccountingCoach.com has free explanations, drills, Q&A, and puzzles on 27 accounting topics.

Let’s illustrate the difference between entries to the general journal versus general ledger with the depreciation associated with a company’s equipment.

The depreciation on equipment is first recorded in the general journal.  A journal lists transactions in order by date and is defined as the book of original entry. To record depreciation on equipment in the amount of $10,000, the general journal will show a date, such as December 31, a debit to Depreciation Expense for $10,000 and a credit to Accumulated Depreciation for $10,000.

The amounts in the general journal are then posted to the specified accounts, which are contained in the general ledger. In our example, the account Depreciation Expense will be debited as of December 31 for $10,000 and the account Accumulated Depreciation will be credited as of December 31 for $10,000.

Learn more about the many accounting topics available at no cost on AccountingCoach.com.

The assets reported as property, plant and equipment are described as long-lived, tangible assets. They are also described as fixed assets or as plant assets.

Generally, the property, plant and equipment assets are reported at their cost followed by a deduction for the accumulated depreciation that applies to all of these assets.

Some companies will list the current liabilities in this order: 1) short-term notes or loans payable, 2) current portions of long-term debt, 3) accounts payable, 4) payroll related liabilities, 5) other accrued expenses, and 6) income taxes payable. Other companies will list its accounts payable ahead of its short-term debt.

After the current liabilities are listed, the long-term or noncurrent liabilities will be listed. This might include long-term debt, bonds payable, and deferred income taxes.

In short, I would arrange the chart of accounts in the order that the accounts will appear on the balance sheet and income statement.

AccountingCoach.com provides two samples of the Chart of Accounts. 

A balance sheet is one of the financial statements that will be distributed outside of the accounting department and is often distributed outside of the company. The balance sheet is organized into sections or classifications such as current assets, long-term investments, property, plant and equipment, other assets, current liabilities, long-term liabilities, and stockholders’ equity. Only the asset, liability, and stockholders’ equity account balances from the general ledger or from the trial balance are then presented in the appropriate section of the balance sheet. Totals are also provided for each section to assist the reader of the balance sheet. The balance sheet is also referred to as the statement of financial position or the statement of financial condition.

Learn more about the Balance Sheet.

If the cement work is an addition or an improvement (more than repairing or maintaining existing cement work), the cost of the cement work is viewed as a new asset. If the amount is significant, you should record the expenditure as an asset and then depreciate the cost over the useful life. However, if the amount of the addition or the improvement is relatively small, the accounting concept of materiality allows you to expense the entire amount immediately.

AccountingCoach.com has free crosswords, word scrambles, drills, and explanations for depreciation, accounting principles, and many more topics.

Learn more about the Balance Sheet.  Also try our Free Interactive Puzzles on Balance Sheet and many more topics. 

One way to enter the transaction is to debit the current asset Prepaid Subscriptions for $24 and to credit Cash for $24. At the end of each month you would make an adjusting entry to debit Subscriptions Expense for $2 and to credit Prepaid Subscriptions for $2. This approach would obviously match the annual cost to each of the 12 periods benefiting from the subscription. However, this is not practical given the small amount involved.

Thanks to the accounting concept of materiality, accountants can ignore the matching principle when the amount is insignificant in relationship to the company’s size. Since no investor or lender would be misled if the entire $24 appeared as an expense in one month and $0 appeared in the other 11 months, the following entry would be more practical: debit Subscriptions Expense for $24 and credit Cash for $24 at the time of entering the invoice into the accounting records.

If the annual subscription was $8,400 for a trade journal and other membership services, a small company will likely find that amount to be significant and should not expense the entire amount in one month.

Learn more about Adjusting Entries.

When a corporation issues shares of its stock for cash, the corporation’s current asset Cash will increase with the debit part of the entry, and the account Contributed Capital will increase with the credit part of the entry. If the corporation then uses some of its cash to purchase equipment, its current asset Cash will decrease and its non-current asset Equipment will increase.

If a corporation receives equipment in exchange for newly issued shares of stock, the non-current asset Equipment will increase and Contributed Capital will increase.

The effects of double entry accounting are illustrated under the topic Accounting Equation.

Now for the reason companies often record purchases in a purchases account. Generally, companies will have a relatively stable amount of inventory and the cost of its annual purchases will be many times the cost of its inventory. This means that most of the cost of its purchases will appear as the cost of goods sold on its income statement. For the minor change in the cost of inventory from the beginning to the end of the accounting period, an adjustment can be made. For example, let’s assume that the cost of purchases during the year amounted to $560,000. Let’s also assume that the inventory at the end of the year has a cost of $70,000 compared to the inventory cost of $67,000 at the end of the previous accounting year. An adjustment will be entered to debit the Inventory account for $3,000 which will increase the Inventory account balance from $67,000 to $70,000. The credit portion of the entry of $3,000 will cause the cost of goods sold to be reported as $557,000 ($560,000 of debits in the Purchases account during the year minus the amount that increased the cost of inventory: $3,000). After this adjustment, the balance sheet will report the true cost of the ending inventory of $70,000 and the income statement will report the true cost of goods sold of $557,000.

Learn more about Inventory and Cost of Goods Sold.

It might be helpful to recall the bank reconciliation rule: Put it where it isn’t. The old check, which you had voided, is now on the bank statement, but it is not in the cash account. Therefore, you need to put the check amount into the general ledger.

Learn more about Bank Reconciliation.

States and jurisdictions have specific requirements that must be met before taking the CPA Exam. In the U.S. it is common for the requirements to include 150 college credits. The accounting material on AccountingCoach.com is perhaps the equivalent of 3 college credits of accounting, while students obtaining an accounting major will have 30 college credits in accounting courses alone.

Since AccountingCoach.com is free, you should learn and review all you can from the website. The website contains drills and puzzles that will give you immediate feedback on your accounting knowledge. For a small fee, you can download 640 accounting exam questions sorted into 16 accounting topics. The download file also contains an answer key. However, you need to keep in mind that these exams and the free material on the site cover the content in only the first one of 10 or 11 college accounting courses.

You should also know that even with 150 college credits, including 30 college credits in accounting, most people cannot pass the CPA Exam. If you wish to be successful, you will need an aptitude for accounting and business in order to master the complex material included on the CPA Exam.

Learn more about Getting Your Accounting Degree and Becoming a CPA.