Intuit Certified Bookkeeping Professional PDF

# Intuit Certified Bookkeeping Professional: Domain 2 - Lesson 1 ## Fill-in-the-Blanks 1. Accounts with a natural **debit** balance increase with a debit transaction and decrease with a credit. 2. **Long-term** assets are intended to be used for more than one year. 3. A **promissory note** is a leg...

# Intuit Certified Bookkeeping Professional: Domain 2 - Lesson 1 ## Fill-in-the-Blanks 1. Accounts with a natural **debit** balance increase with a debit transaction and decrease with a credit. 2. **Long-term** assets are intended to be used for more than one year. 3. A **promissory note** is a legally binding agreement stating that a business is owed money and when payment is expected. 4. Merchandise inventory is a current asset and has a normal **debit** balance. 5. The **weighted average cost** technique uses an item's average cost throughout the year. 6. To account for inventory **shrinkage** a bookkeeper would debit the cost of goods sold (COGS). ## Assets and Natural Account Balance * Assets are anything a business owns; examples include property, inventory, cash, and accounts receivable. * Each asset type has a page in the general journal where values and balances are tracked. * General ledger pages are set up to resemble T-account charts with debits in the left column and credits in the right. * Accounts have a natural balance that makes double-entry accounting work with the accounting equation. * Assets have a natural debit balance, while liabilities and owner's equity accounts have natural credit balances. ### Purpose Upon completing this project, you will better understand the effects of transactions on asset accounts. ### Steps for Completion 1. Franky's Fritters owns a building at 444 Friendly Avenue; the owner purchased the property 35 years ago for $60,000. The property's value has risen dramatically due to new development in the area, and it is now valued at $2,000,000. Franky's bookkeeper, Tera, is setting up bookkeeping software for the first time. * What type of account should she establish to record the building? **Asset** * Should the account have a natural debit or credit balance? **Debit** * What value should she place on the building? **$60,000** 2. Franky's Fritters' inventory records show $5,000 worth of frozen fritters. Tera completes a physical inventory after setting up the new bookkeeping software. The current inventory value is $4,950. * What type of account did she establish to record the inventory? **Asset** * Should the account have a natural debit or credit balance? **Debit** * Will she debit or credit it for the $50.00 shrinkage? **Credit** ## Current vs. Long-Term Assets * Assets are broken into two categories: current and long-term. * Current assets are property that keeps a business fluid, such as cash or accounts receivable. * Long-term assets are property that makes a business stable, such as buildings, computers, or cars. * Current assets are easily converted to cash and are used to pay the day-to-day expenses of doing business. * Long-term assets are intended to last more than a year, depreciate, and generally have a high value. * Assets appear at the top of balance sheets and must equal liabilities plus owner's equity. ### Purpose Upon completing this project, you will be better equipped to identify assets as current or long-term. ### Steps for Completion 1. Franky's Fritters upgraded three computers before its bookkeeper started tracking finances in the new software. Today, Tera received a note from Franky that he purchased a delivery van with a loan from the bank. The van cost $22,000. She also received an invoice from Oven Bros for $2,500 to cover the cost of parts and labor when they installed an oven in the van to warm fritters. Franky asked her to purchase $5000 of frozen fritters to expand the inventory because he hopes the delivery service will boost sales. He already has a standing order for 50 fritters a day to be billed monthly to the high-rise mall next door. Tera calls Franky to tell him the checking account only has $6,000, so she will need to buy the fritters on credit. Identify each asset as current or long-term. * Van: **Long-term** * Frozen Fritters: **Current** * Oven and installation: **Long-term** * 444 Friendly Ave.: **Long-term** * Checking account balance: **Current** * Mall account: **Current** * Computers: **Long-term** ## Accounting for Sales Transactions * Sales is the title given to the revenue account used to record money received for products or services sold by a company. * Revenue accounts are presented at the top of income statements. * Sales affect assets but are not themselves assets. * Revenue accounts have a natural credit balance. * Revenue minus expenses equals the net income or loss of a business. * Assets are created when sales are completed. * Double-entry accounting requires a debit and credit entry. * Therefore, to maintain balance, an asset account would increase with a debit, and a sales revenue account would increase with a credit each time a sale is recorded. * A second transaction would also occur if the company sold an inventory item. * Inventory would decrease with a credit, and the cost of goods sold expense would increase with a debit. ### Purpose Upon completing this project, you will better understand the differences between revenues and assets and how they work together. ### Steps for Completion 1. Franky's Fritters sold $500 worth of fritters to cash customers, $250 worth of fritters on account to long-standing customers, and sold the old computers for $100. How did each sale affect the sales revenue account? * **Fritters for cash:** $500 credit * **Fritters on account:** $250 credit * **Computers:** No affect 2. How did each sale affect the asset accounts? * **Cash:** $600 debit * **Accounts Receivable:** $250 debit * **Equipment:** $100 credit ## Notes Receivable and Uncollectable * Notes receivable are long-term receivables created when payment is not expected within a year. * This type of financial agreement includes a promissory note that states the amount borrowed and the expected payment date. * Amounts paid within the year are current assets and amounts expected beyond the year are long-term assets. * Uncollectible accounts are receivables a company no longer expects to collect. * Accounts become uncollectible for various reasons, including fraud, bankruptcy, and losing track of the debtor. * Companies use a write-off account to prevent paying taxes on revenue not received. ### Purpose Upon completing this project, you will better understand the purpose of promissory notes and what causes uncollectible accounts. ### Steps for Completion 1. Franky decided to sell an old company van to his cousin Vinny. Vinny does not have the $12,000 the van is worth, so Franky agrees to discount the price to $10,000 and take payments. Tera is asked to prepare paperwork to make sure they both understand the agreement. What will Tera prepare? * **Promissory note** 2. Now that the parties have agreed to the terms, Tera needs to record the transaction to keep track of the payments. What type of account will Tera create? * **Notes receivable asset account** 3. Vinny loves his new van and faithfully makes payments until he decides to live in it while roaming the countryside. Franky has not heard from Vinny in more than six months; he tells Tera they probably won't be paid the rest of what Vinnie owes. Where will Tera record the write-off of the van? * **Uncollectible accounts** ## Merchandise Inventory * Goods stocked by companies with the intent to sell are merchandise inventory. * Companies that provide services do not stock as much inventory as companies that offer goods. ### Purpose Upon completing this project, you will be able to identify more merchandise inventory. ### Steps for Completion 1. Franky's Fritters sells fritters, coffee, fountain drinks, and that van he sold his cousin Vinny. Review the items below. Are they inventory? Label them *yes* for inventory or *no* for non-inventory. * **Vinny's Van:** No * **Frozen fritters:** Yes * **Toilet paper:** No * **Large coffee cups:** Yes * **Coffee:** Yes * **Small cup lids:** Yes * **Pencils:** No * **Printer paper:** No ## Inventory Valuation Methods * Inventory valuation methods can dramatically affect assets and owner's equity. * Reports like balance sheets are changed when valuation methods differ. * The consistency assumption created by the Financial Accounting Standards Board (FASB) is essential for this reason. * There are four widely accepted methods of valuation: specific identification, FIFO, LIFO, and WAC. * Specific identification is used for large inventory such as cars or refrigerators. * Inventory items are tracked from the moment they are received until they are sold. * First-in, first-out (FIFO) is the method of selling the first item you purchased before selling the second. * This method is suitable for tracking perishable inventory but is often used for other items. * Last-in, first-out (LIFO) is the method of selling the last thing you purchased before selling the first. * This method is rarely used since it can result in losses. * Weighted Average Cost (WAC) is the method of averaging the purchase prices paid through the year. * This method is used for items that are not easy to tell apart but can be used for other types of inventories as well. ### Purpose Upon completing this project, you will better understand the importance of inventory valuation methods. ### Steps for Completion 1. Franky's Fritters needs to choose an inventory valuation method now that it is no longer being operated out of Franky's garage. He bought 2,500 fritters for $5,000 when he opened the storefront in March. He has replenished his stock monthly with 500 fritters. In April, they cost $750, but in May, they were $1,500. When he added the delivery van in June, he spent $5,000 and received 4,000 more fritters. Tera completed a physical inventory this morning, and there are currently 2,750 fritters in the freezer. Tera wants to show Franky the differences between the valuation methods to help him decide. What is the value of the 2,750 fritters in inventory? * **FIFO**: $3,438 * **LIFO**: $5,375 * **WAC**: $4,482 2. What was the value of the 4,750 fritters sold? * **FIFO**: $8,813 * **LIFO**: $6,875 * **WAC**: $7,768 ## Adjust Inventory Balances * Inventory balances are adjusted after a physical inventory is completed, usually coinciding with the end of an accounting period or fiscal year. * Inventory loss, or shrinkage, happens for various reasons. * Inventory values are not adjusted for appreciation or depreciation; one of the inventory valuation methods must be used consistently for tax purposes and reporting consistency. ### Purpose Upon completing this project, you will better understand when adjusting inventory is appropriate. ### Steps for Completion 1. Franky's Fritters has 2750 fritters valued at $3,438 using the FIFO valuation method. Franky was watching the news this morning and discovered a fritter shortage has caused the value to skyrocket from $1.25 per unit to $3.75 per unit. Can Tera adjust the value of the inventory in the books? * No. The inventory valuation is based on the purchase price, not the market price 2. Franky arrived at the store to discover that a freezer had failed during the night and thawed half of the frozen fritters. Can Tera adjust the value of the inventory in the books? * Yes, after a count is completed. Loss due to spoilage reduces inventory. 3. During the count Tera requested before adjusting for the spoiled fritters, they discovered 750 fritters thawed when the freezer failed, but they were also short another 158 fritters. A review of the receipts shows they were not sold, and an examination of the invoices shows they were received. Can Tera adjust the value of the inventory in the books? * Yes, the inventory is gone. Shrinkage for any reason can adjust inventory.