How Effects the Accounting Transaction

It will be beneficial in the long term to be able to understand a classification approach that emphasizes the effect of accounting events rather than the recording procedures involved. This approach is quite pioneering. although business entity engage in numerous transaction, all transaction can be classified in to one of four types, namely:

1. Source of Asset (SA) An asset account increase and a corresponding claims (liabilities or owners equity)  account increase . Example: 1. Purchase of supplies on account. 2. Sold goods on cash on delivery basis.

2. Exchange of Asset (EA) One asset account increase and others asset account decrease. Example: Acquired for cash.

3. Use of Assets (AU) An asset accounts decrease and a corresponding claims (liabilities or equity) accounts  decrease . Example: 1. Settled accounts payable; 2. Paid salaries of employees.

4. Exchange of Claims (EC) One claims  (liabilities or owners equity) accounts increase and another claims (liabilities or owners equity) account decrease. Example: Received utilities bill but did not pay.

Every accountable events has a dual but self balance effect on the accounting equation. recognizing these events will not in any manner affect the quality  of basic accounting model.

Depreciation Methods

The following are the four more common depreciation methods used in the business. Straight Line, Unit of Production, sum of the year digit and declining balance. but first let discuss the straight line methods.

Straight Line Methods

The straight line method of determining depreciation provide for equal amounts of periodic expense over the estimate useful life of the asset. This methods relates depreciation directly to the passage of time. Depreciable cost of the asset is determined by subtracting the estimated salvage value  from the original cost of the asset. The useful life is then divide into the depreciable cost. The resulting amount is an annual depreciation expense that is constant over the life of the asset.

                                                   

                                                Original Cost - Salvage Value               
Straight Line method                 ______________________
                                           
                                                      Estimated useful life        


Example: Computer equipment for     90,000.00
               Shipping charges were           1,250.00
               Installation of program            3,750.00
                                                             95,000.00           

The equipment expected to last four year and has a salvage value of 15,000.00

                                               95,000.00 - 15,000.000
Annual Depreciation          _________________________    =  20, 000.00
                                                           4

No.Year        Annual Depreciation      Accumulated Dep.     Book Value
                                                                                             95,000.00 - original cost
      1                     20,000.00                  20,000.00              75,000.00
      2                     20,000.00                  40,000.00              55,000.00
      3                     20,000.00                  60,000.00              35,000.00
      4                     20,000.00                  80,000.00              15,000.00 - salvage value

Note the initial book value of equipment is 95,000.00 is also the original cost of the asset and the final book value of 15,000.00 is equal to the salvage value of the asset. As the computer is used, depreciation increase and the book value is decrease. at the of its useful life of four years, the computer is said to be fully depreciated.

                                     
            

The Accounting Equation

Financial statement tell us how a business is performing. They are the final product of all accounting process. But how do we arrive at the items and amounts that make up the financial statements? The most basic tool of accounting is the accounting accounting equation. This equation presents the resources controlled by the enterprise , the present obligation of the enterprises and the residual interest in the assets. It state that the assets must always to equal liability and owners equity. The basis accounting model is :

Assets   =   Liabilities   +    Owners Equity

Note that the assets are on the left side of the equation, opposite the liabilities and owners equity. This explain why increase and decrease in asset are recorded in the opposite manner as liabilities and owners equity are recorded. This equation also explain why liabilities and owners equity follow the same rules of debit and credit. the logic of debiting and crediting is related to accounting equation.

 

Prepaid Expense

These are expense paid for by the business in advance. it is asset because the business avoid having to pay cash in the future for a specific expense. It same insurance and rent the firm paid it for advance. These  prepaid item represent future economic benefits (asset) until the time it start to contribute to earning process; these, then become expenses. it is also the item that always has adjustment monthly by prepaid to expense.

Trade Discount

Trade discount is one way of increasing sales because it encourage the buyer to purchase the product at low prices. Trade discount and cash discount is same way, this two enables the supplier to vary prices periodically without the inconvenience of revising price list.

Example:

Game plan marketing quoted a list price of 2,500 for each Ipod nano, less a trade discount of 20%. if the open space media company, ordered 10 units, the invoice price would be as follows.

List price (2,500 x 10 )            25,000.00
Less: 20% trade discount         5,000.00
Invoice price                            20,000.00

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The Law of Demand

Demands is anything we need, wants or desired to be owned, that we can afford to pay it.

The higher the price, the lower the quantity demands. Meaning, the higher price of goods less people buy or demand that goods. The graph below we apply the law of demand.The asterisk (*) is represent the curve of demand and each asterisk (*) has a relationship between the Price and Quantity demand. Look at the point P1 and Q1 it says the higher price, low quantity demand. and at the point P3 and Q3 it says the low price, higher the quantity demand.

Price
    |
p1|_____*    
    |          |
p2|_____|______ * Demands
    |          |            |
p3|_____|______|______*
    |          |            |            |
    |_____|______|______|_____Quantity
              q1        q2         q3


In P3 and Q3 it says also the high on quantity demand, the low the price. Again, the meanings is low price of the goods, the more people will buy or demand that goods.   

Inventory Reconciliation

Inventory Reconciling is a one way of maintaining and checking accurately on hand balance of inventory. Its helps to management to know how much the available balance of inventory time to time because it can help project the sales. Another is to know what product or item are the fast moving and non moving, from this they can evaluate what the product  do more to sell, or what product they maximize to sell.

Inventory Reconciliation is important not only for projecting but also to maintaining, specially the physical of inventory, from that we can check the product or inventory from damages, expiry date and etc. For the result of this checking we can now eliminate the cause, why does has damage?

The inventory count conduct monthly inventory or annually and depend to company when they want.The good Inventory reconciling is done by comparing the physical count against to ending balance from inventory database. How is it?

First, generate the ending balance of inventory from inventory database, or the print copy of ending inventory from the inventory database, and it is serve a count list at the warehouse when counting or inventory sheet, it show like this..

No.        Item Name                Ending Balance per Qty    Actual Count per Qty   Discrepancy

1            CokeReg. 1.5L                      500 

2            CokeZer.  1.5L                      600
3            CokeLtg   1.5L                      150

4            CokeReg. 1.0L                     1500
5            CokeZer. 1.0L                      2000

_______________________________________________________________


When done the physical count, the inventory sheet shows like this..


No.        Item Name                Ending Balance per Qty      Actual Count per Qty      Discrepancy


1            CokeReg. 1.5L                      500                                      500                        0            
2            CokeZer.  1.5L                      600                                      600                        0
3            CokeLtg   1.5L                      150                                      150                        0


4            CokeReg. 1.0L                     1500                                     1500                      0
5            CokeZer. 1.0L                       2000                                    2000                       0


By then, The inventory database versus actual count is no discrepancy. Means, no problem about warehouse and the posting of purchase nor sell to database.

Income Statement Example

Open Space Marketing Solution Inc.
          Income Statement
for the year ended December 2011


Revenue                                                            12,344,310.42


Less: Cost of Sales

Direct Cost - Materials     1,478,051.71
Direct Cost - Labor             339,029.26
Direct Cost - Rental         1,943,080.12
Direct Cost - Others           130,929.65              3,891,090.74
Gross Profit                                                      8,453,219.68

Less: Operating Expense

Salaries & wages                4,816,688.00
Office Supplies                         89,177.58
Communication Exp.              177,759.55
Light & Water                         172,675.00
Representation                       142,677.23
Taxes & License                      65,535.28
Transpo & Travel                     55,901.64
Legal Fees                             455,150.00
Rent Expense                        317,500.00           6,293,064.28
Income Before Tax                                          2,160,155.54

Less: Provision for Income Tax     30%              64,804.66    

Income After Tax                                              2,095,350.88   


 The 30% provision for income tax exercise only to Philippines setting. and this income statement pattern to a advertising company in the Philippines.                                       

Present Value and example

Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given rate. also the current value of a future payment.The question for that is  What is the value of your money today that you received in the future? or What the value of a cash flow received in the future would be worth today?

Hint :  amount gets smaller
       : PV = Present Value - how much money a person has today
       : FV = Future Value - how much money a person expect to have in a future
       : i     = percentage rate paid on investment
       : t    = lenght of time of investment

Formula : PV = FV / (1+i )

Example : How much would 100 pesos received 5 years from now be worth today if the current interest rate is 10%?

Formula : PV = FV / ( 1+i )5
Subtitute: PV = 100 / ( 1+.1)5
                     = 100 / (1.1) (1.1) (1.1) (1.1) (1.1)
                     = 62.09

The 5 years interest elaborate for the benefit also for non scientific calculator user.
the 62.09 is the worth of your money (100 pesos) today.