Question

What are the types of adjusting entries? Know how to do adjusting entries.

How do you calculate cost of goods sold?

How do you calculate cost of goods available for sale?

What are the inventory methods and the tax effects of each one of them? (pg 255 – 261)

What are the four basic financial statements and how they are related to each other?

What are the characteristics of useful information (pg 49) and the constraints in accounting (pg 51)?

Answer 1

1. Basically, there are 4 types of adjusting entries:

a) Accrued income- Income earned but not yet received

b) Accrued expense - Expense incurred but not yet paid

c) Deferred income- Income received but not yet earned

d) Prepaid expense- Expenses paid but not yet incurred.

There can be other adjusting entries also, relating to Depreciation and Bad debts and other allowances.

Know how or rules of making the adjusting entries:

a) Adjusting entries are prepared by following the accrual concept and matching concept of accounting, which means recording of revenues and matching the expenses when they are earned and incurred respectively regardles of when payment is made.So, adjusting entries will never include cash.

b) The adjusting entry will always have one Real or Balance sheet account and one nominal or income statement account.

c) While doing the adjusting entries, we simply apply the journal entry rules relating to the particular accounts involved.

2. Cost of the goods sold : It is the direct cost related to the goods sold in the company.

Cost of the goods sold = Beginning inventory of the goods + Purchases / goods produced+ all Direct expenses related to goods/production e.g. freight - Ending inventory of the goods.

3. Cost of the goods available for sale: It tells us how much inventory do we have on our hand to sell to our customers. It is the total cost of beginning inventory plus the cost of finished goods produced or purchased.

Cost of the goods available for sale = Beginning inventory + Purchases/ goods produced + all direct expenses related to goods/production e.g. freight

5. Four basic financial statements are:

Income statement, Balance sheet, Statement of changes in equity, Statement of cash flows

All four financial statements are related to each other in a way that each financial statement takes its one or more data figures from the other financial statements. For example:

a) Net income from the income statement flows to the balance sheet, cash flow statement and statement of equity.

b) Depreciation is deducted in income statement, depreciation is added back and capital expenditure is deducted in cash flow statement, which determines the Fixed asset balance in the balance sheet.

c) Cash flow statement gives the final balance of cash at the end of accounting year, which is then taken to Balance sheet.

d) Statement of changes in equity gives the balance of equity to be taken to the Balance sheet.