FIFO stand for First In; First Out for and LIFO stand for Last in, FIrst Out.
The two are inventory process for handling material in storage before being sold.
For FIFO the material that is bought first for inventory is the first to be used or sold.
For LIFO the last material kept in inventory will be used or sold before material recently bought for inventory.
The operating cycle begins with spending cash and it ends with receiving cash from customers.
The following steps are:
1. Purchasing activity: buying product usually at a wholesale price and selling at retail price.
2. Receiving product and taking in inventory to put in the market.
3. Sales Activity: selling products to customers that are seeking products.
4. Recording the sale of the product and collecting cash.
The step are than repeated for the operating cycle of a merchandising business.
The operating cycling for retailers are usually shorter than manufactures because retailers product are ready to sale to customer.
Retailers have to better management of inventory so that they don't run out product. Making customers leave their business and go to another that sell the same thing. They don't want to hold a bunch of inventory, because it takes up space, which cost money, and restricting cash flow because product are being held on shelf; not producing income.
Business entity concepts limits the economic data in an accounting system to data related to directly to the activities of the business. This makes the business be seen as an entity separate form its owners, creditors, or other business.
A business entity can be created in the following:
Bad Debt Expense is a decision made by the owner that decided that a customer is not going to pay for their services or products.
Usually when a sale occurs. Customer have an agreement with the owner to pay for the services or product by certain amount of time. Some payment can be due on the same day, while, other can be paid in 15, 30, or 60 days as an example.
When services or product have been completed by the business owner. The owner records the sale on the profit and loss statement and records money owed on account receivable on the balance sheet.
Once attempts have been made to collect and issue arises with the customer on payment. The accounts receivable is deducted and increase to allowance for doubtful account on the balance sheet to show that there is a risk that money might not be collected, but still have a possibility that it might be paid.
Once you realized that the customer is not going to pay for services or product. You would deduct the allowance for doubtful account from the balance and increase bad debt expense on the profit and lost statement to show a loss in operation for work no paid.
Intangible Assets are intellectual property that is not physical in nature, but have value that a company owns for business operation.
Item that are consider Intangible Assets are:
Intangible Assets are not physical assets like machines or buildings.
They can be creative ideas that company use to differentiate themselves from competitors in Marketing and Products. Customers lists and relationship that is build to keep revenue streams flowing into the company. Contracts they have with partners and employees.
1. Identify the transaction from source documents, like purchase orders, loan agreements, invoices, etc.
2. Record the transaction as a journal entry.
3. Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been represented as Ts, or so-called T-accounts, with debits on the left and credits on the right.
4.At the end of the reporting period (usually the end of the month), create a preliminary trial balance of all the accounts by:
(a) netting all the debits and credits in each account to calculate their balances and
(b) totaling all the left-side (i.e., debit) balances and right-side (i.e., credit) balances. The two columns should be equal.
5.Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time.
6.Create an adjusted trial balance of the accounts. Once again, the left-side and right-side entries - i.e. debits and credits - must total to the same amount. (To learn more see, Fundamental Analysis: The Balance Sheet.)
7.Combine the sums in the various accounts and present them in financial statements created for both internal and external use.
8.Close the books for the current month by recording the necessary reversing entries to start fresh in the new period (usually the next month).
Services Business: provides services rather than products to customers.
Depreciation is the systematic reduction of the recorded cost of a fixed asset.
Examples of fixed assets that can be depreciated are buildings, furniture, leasehold improvements, and office equipment. The only exception is land, which is not depreciated. The purpose of depreciation is to charge to expense a portion of an asset that relates to the revenue generated by that asset. This is called the matching principle, where revenues and expenses both appear in the income statement in the same reporting period, which gives the best view of how well a company has performed in a given accounting period.
There are three factors to consider when you calculate depreciation, which are:
Depreciation has nothing to do with the market value of a fixed asset, which may vary considerably from the net cost of the asset at any given time.
To Calculate Depreciation for an asset is:
1. Write down the asset’s purchase price.
2. Estimate the salvage value, or how much the asset will be worth when it's no longer useful.
3. Calculate Depreciable Cost: purchase price - salvage value.
4. Estimate the asset's lifespan, which is how long you think the asset will be useful for.
5. Find the amount of Depreciation per Year by calculating depreciable cost/asset's lifespan.
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