Bookkeeping

There are 6 types of accounts:

• Asset - Stuff you own
• Liability - Stuff you owe 3rd parties
• Equity (Stockholders' Equity) - Stuff for owners
  • Revenue - Money you earn from selling stuff
  • Expense - Costs of doing business
  • Dividend - Money given to owners

R,E,D all feed into Equity. This will be further explored in Financial Statements.

From money to go to one account (source), it must come from another (destination). This is the duality of every transaction in accounting.

$\uparrow$ Debit (Dr) is the term to describe the destination of money flow, whereas $\downarrow$ Credit (Cr) is the term to describe the source of money flow.

A special category of stocks. They have a fixed dividend rate which is paid before common stockholders. However, they do not have voting rights.

The preferred stock holders offers two dividend options:

1. Current - Paid in the current period, limits to before common stockholders
2. Cummulative - Paid in the future if not paid in the current period. This amount is called dividends in arrears.

Preferred stock has a fixed dividend rate, which is given by:

They have a separate par value from common stock.

As their dividends are paid first:

"Preferred stock: $20 par value, 1% rate, 1000 shares. Common stock: $10 par value, 5000 shares." $\implies$ PD = $20 \times 1000 \times 0.1 = 2000$

Consider a issurance of $3000 dividends, for current preference:

$\text{PD}=2000$,

$\text{CD} = 3000 - \text{PD} = 1000$

Consider a issurance of $10000 dividends, for cummulative preference, dividends in arrears for 2 years:

$\text{PD} = 2000 + 2000 * 2 = 6000$ (first 2000 is the current year's),

$\text{CD} = 10000 - \text{PD} = 4000$

When a stock is sold. Other than recording the stock issurance, we also need to record the

$\Delta$Common Stock = Stock Issurance = Number of shares $\times$ Par value

$\Delta$APC = Value - Stock Issurance

"Issued 200m additional shares of $0.01 par value for $16m" $\implies\ \Delta$APC = 14m, $\Delta$CS = 2m

Example entry:

When we declare a dividend, we allocate money to the owners from retained earnings.

"Declared dividends of $2m"

Example entry:

When we reissure stock, we need to credit treasury stock instead of common stock, as we pull from our own stock. We also need to record the additional paid-in capital when we sell the stock for more than its par value.

"Reacquired 10 shares of common stock when selling for $14 per share." $\implies \Delta$Treasury = 140

Example entry:

"Reissued 1 shares of treasury stock at $13 per share" $\implies \Delta$APC = -1 (less than par value), $\Delta$Treasury = 14

Example entry:

There are two ways we can record COGS and inventory in an according period:

• As the goods are sold / purchased (Perpetual)
  • $\checkmark$ Updates accounts in real-time
  • $\times$ More complex, more costly
• At the end of the period (Periodic)
  • $\times$ Does not update accounts in real-time
  • $\checkmark$ Less complex, less costly

Reflects the changes in inventory during an accounting period, with the total cost of good sold depending on cost flow assumptions.

To determine the COGS when we purchased the goods at different costs, we can use the following assumptions:

• FIFO - First In, First Out
• LIFO - Last In, First Out
• AVCO - Average cost of all units (Total cost / Available units)
• Specific Identification - Ratio / quantity specified They are assumptions because we do not know which physical units were sold.

1. ?
   $\ =1(100)+2(50)=200$
2. ?
   $\ =2(100)+1(50)=250$
3. ?
   $\ =\frac{500}{300}(150)=250$

We need to report inventory at its minimum of the cost or NRV. This is to prevent overstating the value of inventory.

If $NRV < Cost$, the company would make a “write-down” entry of $(Cost - NRV) \times units$ to reduce the inventory balance to NRV. (As they are originally recorded at cost).

Example: The company has 1000 units of inventory at $10 each. The NRV is $8.

The valuation used at the end of this period would be $1000 \times 8 = 8000$. As $NRV < Cost$, we need to make the following entry:

$(10-8)\times1000=2000$

• Maintenance - Expense
• Improvements - Capitalized Some identifying characteristics of improvements are large sums of money, longer useful life, and increased efficiency.

1. Record depreciation expense of the item for this period
2. Calculate and write-off accumulated depreciation for this item
3. Record the disposal of the asset by crediting it
4. Record "gain on sale of assets" (revenue) or "loss on sale of assets" (expense) by balancing the entry

Example: Southwest Airlines sold flight equipment for $11 cash at the end of its 17th year of use. The flight equipment originally cost $30 and was depreciated using the straight-line method with zero residual value and a useful life of 25 years.