Domain 2 Lesson 2
29 | Domain 2 Lesson 2: Adjust Inventory Balances
Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Fill-in-the-Blanks
Instructions: While watching Domain 2 Lesson 2, fill in the missing words according to the information presented by the
instructor. [References are found in the brackets.]
1.
depreciates the asset at an equal amount over its useful life. [Service Life
and Depreciation]
2.
To record depreciation, an accountant would make a
to increase depreciation expenses
and
the associated asset account to decrease a long-term asset’s value. [Depreciation Expense on
Income Statements]
3.
Assets must always
4.
Merchandise inventory is an asset, so a cash purchase does not affect the balance of the accounting equation, but
a credit purchase raises both
while owner’s equity stays the same.
[Merchandise Inventory Effects]
5.
PP&E stands for property,
Equipment]
6.
liabilities
owner’s equity. [Sales Transaction Effects]
, and equipment. [Common Property and
income is earned by allowing someone to use intellectual property or resources. [Other
Asset Transaction Effects]
30 | Domain 2 Lesson 2: Fill-in-the-Blanks
Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Service Life and Depreciation
on Income Statements
Service life is another word for useful life, the amount of time an asset will be
helpful to a company. Depreciation is the value an asset loses with time and use.
A company can use many forms of depreciation for its reporting, but the IRS
accepts only one method: Modified Accelerated Cost Recovery System (MACRS).
Other methods include straight-line, sum-of-the-years digits, units-ofproduction, and double-declining balance.
Depreciation expenses are listed on the income statement alongside other
expenses. Assets being depreciated are listed according to categories alongside
other business expenses having similar purposes. Expenses have natural debit
balances. Income statements present revenues first, expenses second, and net
profit or loss last.
Purpose
Upon completing this project, you will better recognize terms referring to
depreciation.
Steps for Completion
1.
Because expenses lower net income
b. Because expenses are liabilities
2.
Net profit/loss is the difference between revenues and expenses.
Why?
a.
Project file
N/A
Estimated completion time
5 minutes
Video reference
Domain 2
Topic: Depreciation Concepts and
Terminology
Subtopic: Service Life and
Depreciation; Depreciation Expense
on Income Statements
Objectives covered
2 Accounting for Assets and Sales
Transactions
2.3 Define depreciation concepts and
terminology
2.3.1 Describe principles relating
to service life and depreciation
2.3.2 Identify how depreciation
expense is reported on income
statements
Notes for the teacher
Depreciation reduces the owner’s equity. Why?
a.
Project Details
If time permits, list assets companies
would need to depreciate and the
probable expense categories. For
example, Franky’s Fritters would
depreciate freezers with other
operational expenses but computers
with administrative expenses.
Because revenue equals the cash in the bank
b. Because revenue is income from sales, and expenses are costs
3.
Expenses are listed on the income statement according to purpose. Why?
a.
Because grouping expenses helps owners control cost categories
b. Because grouping expenses is easier for bookkeepers than listing them alphabetically
4.
Operating, administrative, and other expense categories can contain depreciation expenses for different assets.
Why?
a.
Because bookkeepers should divide expenses evenly by department
b. Because assets are used for different purposes throughout the company
31 | Domain 2 Lesson 2: Service Life and Depreciation on Income Statements
Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Sales Transactions and
Merchandise Inventory
Project Details
Project file
N/A
Estimated completion time
Sales transactions can occur in one of two ways, a cash sale or on account. The
accounts affected are a revenue account, and either the cash account or an
account receivable billed to the customer. Cash and accounts receivable are
assets with a natural debit balance. Sales would increase the amount in the cash
account or increase the value of the receivable account. Revenue accounts have
natural credit balances. A sale would increase the value of the revenue account
as well. A sales transaction entry would be a debit to cash or account receivable
and a credit to the revenue account of equal value.
Once a sale is completed, another transaction is recorded to remove items sold
from inventory. Merchandise Inventory accounts have natural debit balances as
inventory is an asset. The cost of goods sold expense account also has a natural
debit balance. These accounts are both increased with debits and decreased by
credits. A sale is recorded as a credit to merchandise inventory and a debit to
the cost of goods sold in the amount of inventory valuation as calculated by
FIFO, LIFO, WAC, or another valuation method.
Purpose
Upon completing this project, you will better understand the record-keeping
procedures for the sale of inventory.
Steps for Completion
1.
5-10 minutes
Video reference
Domain 2
Topic: Effects on the Accounting
Equation
Subtopic: Sales Transaction Effects;
Merchandise Inventory Effects
Objectives covered
2 Accounting for Assets and Sales
Transactions
2.4 Describe the effect of asset and
sales transactions on the accounting
equation
2.4.1 Describe the effect of sales
transactions on the accounting
equation
2.4.2 Describe the effect of
merchandise inventory on the
accounting equation
Notes for the teacher
Discuss the difference between
inventory sales and property sales.
Inventory sales exchange goods for
money as part of daily business.
Property sales exchange goods for
money outside regular business, such as
selling a company vehicle or an old
computer.
When Franky’s Fritters opened on March 3, 2021, they had 1,842 fritters
in inventory, each costing $1.25 for a total inventory value of $2,302.50.
The fritter shortage had caused the storefront to have a dramatic
increase in walk-in sales. The phones were also busy with orders from
customers hoping to have fritters delivered. By the end of business Tera
reported they had cash sales of $4,347 and total receivable sales of
$2,400; $2,000 to Minnie’s Mall and $400 to Mood Food. Freddy ran to check the freezers; there were only two
fritters left. Using the journal below, finish recording the day’s business.
Date
3/3/21
Account
Debit
$4,347.00
$2,000.00
$400.00
Credit
$0.00
$0.00
$0.00
Fritter Sales Revenue
Cost of Fritters Sold
Frozen Fritter Inventory
32 | Domain 2 Lesson 2: Sales Transactions and Merchandise Inventory
Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Common Property, Equipment,
and Other Assets
Property and equipment are inventoried in accounts separate from merchandise
inventory. Merchandise is intended to be sold, while property and equipment
are intended to be used. Property and equipment often carry a high cost and
are a company’s fixed assets.
Project Details
Project file
N/A
Estimated completion time
5 minutes
Video reference
Other items to consider include interest income and expense, royalty income,
and how passive changes affect the financial statements.
Domain 2
Topic: Effects on the Accounting
Equation
Subtopic: Common Property and
Equipment
Purpose
Objectives covered
Upon completing this project, you will better understand the effect of assets and
passive financial changes.
Steps for Completion
1.
is received as compensation for the use
of intellectual property.
2.
happen when companies pay interest on
money they owe.
3.
is a return generated by money held in
banks or by receivable credit issued to customers.
4.
is money companies earn without sales
and services.
5.
2 Accounting for Assets and Sales
Transactions
2.4 Describe the effect of asset and
sales transactions on the accounting
equation
2.4.3 Describe the effect of
common property and equipment
entries on the accounting equation
2.4.4 Describe the effect of other
asset transactions on the
accounting equation
Notes for the teacher
Please note for students the distinction
between expenses and liabilities.
Liabilities are money owed to others,
and expenses are money spent.
are money spent by companies while
doing business.
33 | Domain 2 Lesson 2: Common Property, Equipment, and Other Assets
Intuit Certified Bookkeeping Professional Project Workbook, First Edition