INTANGIBLE ASSETS
Intangible assets are rights, privileges, and
competitive advantages that result from the
ownership of long-lived assets that do not
possess physical substance.
 Intangibles may arise from government
grants, acquisition of another business, and
private monopolistic arrangements.

ACCOUNTING FOR
INTANGIBLE ASSETS
In general, accounting for intangible
assets parallels the accounting for
capital assets.
 Intangible assets are:
1. recorded at cost;
2. written off over useful life in a
rational and systematic manner;
3. at disposal, book value is eliminated
and gain or loss, if any, is recorded.

ACCOUNTING FOR
INTANGIBLE ASSETS

Differences between the accounting for
intangible assets and the accounting for
capital assets include:
 To record amortization, Amortization Expense is
debited and the specific intangible asset is
credited.
 The amortization period is the shorter of its
useful life and its legal life. In no case can the
amortization period exceed 40 years.
 Amortization is typically computed on a
straight-line basis.
PATENTS




A patent is an exclusive right issued by the Federal
Government that enables the recipient to
manufacture, sell, or otherwise control his or her
invention for a period of 20 years from the date of
filing the application.
The initial cost of a patent is the cash or cash
equivalent price paid when the patent is
acquired.
Legal costs incurred in successfully defending
the patent are added to the Patent account and
amortized over the remaining useful life of the patent.
The cost of the patent should be amortized over its
20-year legal life or its useful life, whichever is
shorter.
RECORDING PATENTS
National Labs purchases a patent at a cost of $60,000 with
a remaining legal life of the patent of 12 years. If the useful
life of the patent is eight years, the annual amortization
expense is $7,500 ($60,000 ÷ 8).
Patent Expense is classified as an operating expense in the
income statement. The entry to record the annual patent
amortization is:
Date
Account TitlesandExplanation
Dec. 31 AmortizationExpense
Patents
Torecordpatent amortization.
Debit Credit
7,500
7,500
COPYRIGHTS



Copyrights are granted by the federal
government, giving the owner the
exclusive right to reproduce and sell
an artistic or published work.
Copyrights extend for the life of the
creator plus 50 years or useful life,
whichever is shorter.
The cost of a copyright consists of the
cost of acquiring and defending it.
TRADEMARKS AND TRADE NAMES
A trademark or trade name is a word, phrase,
jingle, or symbol that distinguishes or
identifies a particular enterprise or product.
 If the trademark or trade name is
purchased, the cost is the purchase price.
 If it is developed by a company, the cost
includes legal fees, registration fees, design
costs, and successful legal defence fees.
 Intangible assets with indefinite useful lives
are not amortized.

FINANCIAL STATEMENT
PRESENTATION



In the balance sheet, property, plant and
equipment, natural resources, and
intangible assets are often combined
under the heading Capital Assets.
There should be disclosure of the
balances in the major classes of assets
and accumulated amortization of major
classes of assets or of assets in total.
The amortization methods used should be
described and the amount of amortization
expense for the period disclosed.
PRESENTATION OF CAPITAL ASSETS
The capital assets of Andres Wines Ltd at March 31, 2000
is summarized in the balance sheet and detailed in Note
3 to the financial statements:
ANDRES WINES LTD.
3. Capital Assets (thousands of dollars)
Land
Vineyards
Buildings
Machinery and equipment
Goodwill
Accumulated
Cost Amortization
2,349
0
5,937
0
17,181
4,971
38,914
21,744
25,000
2,906
89,381
29,621
Net
2,349
5,937
12,210
17,170
22,094
59,760
The notes to the financial statements reports that amortization is calculated on the
straight-line basis using the following rates and useful lives: Buildings, 2.5 percent
per year, manufacturing machinery and equipment, 7.5 percent per year, other
equipment 10-20 percent per year and goodwill, 15 years.
CURRENT ASSETS
RECEIVABLES
The term receivables refers to amounts due
from individuals and other companies; they
are claims expected to be collected in cash.
 Three major classes of receivables are:
1. Accounts Receivable
2. Notes Receivable
3. Other Receivables

ACCOUNTS RECEIVABLE
The three primary accounting problems
associated with accounts receivable are:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
RECOGNIZING ACCOUNTS
RECEIVABLE
GENERAL JOURNAL
Date
July 1
Account Titles and Explanation
Accounts Receivable - Adorable Junior
Sales
To record sales on account.
Debit
1,000
Credit
1,000
When a business sells merchandise to a customer on
credit, Accounts Receivable is debited and Sales is
credited.
RECOGNIZING ACCOUNTS
RECEIVABLE
GENERAL JOURNAL
Date
July 5
Account Titles and Explanation
Sales Returns and Allowances
Accounts Receivable - Adorable
To record merchandise returned.
Debit
100
Credit
100
When a business receives returned merchandise
previously sold to a customer on credit, Sales
Returns and Allowances is debited and Accounts
Receivable is credited.
RECOGNIZING
ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Cash ($1,000 - $100)
Accounts Receivable - Adorable
To record collection of account.
Debit
900
Credit
900
When a business collects cash from a customer for
merchandise previously sold on credit, Cash is
debited and Accounts Receivable is credited.
RECOGNIZING ACCOUNTS
RECEIVABLE
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Accounts Receivable - Adorable
Interest Revenue
To record interest on amount due.
Debit
13.50
Credit
13.50
When financing charges are added to a balance
owing, Accounts Receivable is debited and Interest
Revenue is credited.
VALUING ACCOUNTS RECEIVABLE
To ensure that receivables are not
overstated on the balance sheet, they
are stated at their net realizable value.
 Net realizable value is the net amount
expected to be received in cash and
excludes amounts that the company
estimates it will not be able to collect.

VALUING ACCOUNTS RECEIVABLE
• Two methods of accounting for uncollectible
accounts are:
1. Allowance method
2.
Direct write-off method
DISPOSING OF
ACCOUNTS RECEIVABLE
To accelerate the receipt of cash from
receivables, owners frequently:
1. sell to a factor, such as a finance
company or a bank, and
2. make credit card sales.
DISPOSING OF
ACCOUNTS RECEIVABLE
A factor buys receivables from businesses
for a fee and collects the payments
directly from customers.
 Credit cards are frequently used by
retailers who wish to avoid the paperwork
of issuing credit.
 Retailers can receive cash more quickly
from the credit card issuer.

CREDIT CARD SALES
Three parties are involved when credit cards
are used in making retail sales:
1. the credit card issuer,
2. the retailer, and
3. the customer.
 The retailer pays the credit card issuer a
percentage fee of the invoice price for its
services.
 From an accounting standpoint, sales from
bank cards (e.g., Visa and MasterCard) are
treated differently than sales from non-bank
cars (e.g., American Express).

BANK CARD SALES
Sales resulting from the use of VISA and
MasterCard are considered cash sales
by the retailer.
 These cards are issued by banks.
 Upon receipt of credit card sales slips
from a retailer, the bank immediately
adds the amount to the
seller’s bank balance.

BANK CARD SALES
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Cash
Credit Card Expense ($1,000 x 3.5%)
Sales
To record VISA credit card sales.
Anita Ferreri purchases a number of
compact discs for her restaurant from
Karen Kerr Music Co. for $1,000
using her Royal Bank VISA card. The
service fee that the Royal charges is
3.5 percent.
Debit
965
35
Credit
1,000
NON--BANK CARD SALES
NON


Sales using American Express and
other non-bank cards are reported as
credit sales, not cash sales.
Conversion into cash does not occur
until American Express remits the net
amount
to the seller.
NON--BANK CARD SALES
NON
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Accounts Receivable
Credit Card Expense ($500 x 5%)
Sales
To record American Express
credit card sales.
Kerr Music Co. accepts an
AMERICAN EXPRESS card for a
$500 sale. The service fee that
AMERICAN EXPRESS charges is
5 percent.
Debit
475
25
Credit
500
NOTES RECEIVABLE
A promissory note is a written promise to
pay a specified amount of money on
demand or at a definite time.
 The party making the promise is the
maker.
 The party to whom
payment is made is
called the payee.

ILLUSTRATION 9-8
FORMULA FOR
CALCULAT
ALCULATING
ING INTEREST
The basic formula for calculating interest on an
interest-bearing note is:
Face Value
of Note
X
Annual
Interest
Rate
X
Time
in Terms of
One Year
=
Interest
The interest rate specified on the note is an annual rate
of interest.
RECOGNIZING NOTES RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
May 1 Notes Receivable
Accounts Receivable — Brent Company
To record acceptance of Brent
Company note.
Debit
Credit
1,000
1,000
Wilma Company receives a $1,000, 6% promissory
note, due in two months (July 31) from Brent
Company to settle an open account.
VALUING NOTES RECEIVABLE


Like accounts receivable, short-term
notes receivable are reported at their
net realizable value.
The notes receivable
allowance account is
Allowance for
Doubtful Notes.
HONOUR OF NOTES RECEIVABLE
GENERAL JOURNAL
Date
Account Title and Explanation
Sept. 30 Cash
Notes Receivable - Higly
Interest Revenue
To record collection of Higly note.
Debit
Credit
10,150
10,000
150
• A note is honoured when it is paid in full at its maturity date.
• Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4.5%
interest-bearing note, due in 4 months, on September 30.
• Wolder collects the maturity value of the note from Higley on
September 30.
DISHONOUR OF NOTES RECEIVABLE
GENERAL JOURNAL
Date
Account Title and Explanation
Sept. 30 Accounts Receivable - Higly
Notes Receivable - Higly
Interest Revenue
To record the dishonour of Higly note.
Debit
Credit
10,150
10,000
150
• A dishonoured note is a note that is not paid in full at
maturity.
• A dishonoured note receivable is no longer negotiable.
• Since the payee still has a claim against the maker of the
note, the balance in Notes Receivable is usually transferred
to Accounts Receivable.
BALANCE SHEET PRESENTATION
OF RECEIVABLES
• Each of the major types of receivables should
be identified in the balance sheet or in the
notes to the financial statements.
• In the balance sheet, short-term receivables
are reported within the current assets section
below cash and temporary investments.
• Both the gross amount of receivables and the
allowance for doubtful accounts should be
reported.
CASH
Cash includes coins, currency, cheques,
money orders, and money on hand or on
deposit at a bank or similar depository.
 Internal control over cash is imperative in
order to safeguard cash and assure
the accuracy of the
accounting records for cash.

CONTROL OVER CASH RECEIPTS


Only designated personnel should be
authorized to handle or have access to
cash receipts.
Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash
CONTROL OVER CASH RECEIPTS
Documents should include:
1. remittance advices
2. cash register tapes
3. deposit slips
Cash should be stored in safes and bank
vaults.
Access to storage areas should be limited
to authorized personnel.
Cash registers should be used in executing
over-the-counter receipts.

CONTROL OVER CASH RECEIPTS



Daily cash counts and daily comparisons of
total receipts should be made.
All personnel who handle cash receipts
should be bonded and required to take
vacations.
An important tool in control of over-thecounter receipts is cash registers that are
visible to customers.
CONTROL OVER CASH DISBURSEMENTS



Payments are made by cheque rather
than by cash, except for petty cash
transactions.
Only specified individuals should
be authorized to sign cheques.
Different departments or individuals should
be assigned the duties of approving an item
for payment and paying it.
CONTROL OVER CASH DISBURSEMENTS
Prenumbered cheques should be used
and each cheque should be supported by
an approved invoice or other
document.
 Blank cheques should be stored
in a safe.
1. Access should be restricted to
authorized personnel.
2. A cheque writer machine should be
used to imprint the amount on the
cheque in indelible ink.

CONTROL OVER CASH DISBURSEMENTS


Each cheque should be compared with
the approved invoice before it is issued.
Following payment, the approved invoice
should be stamped PAID.
PETTY CASH FUND
 A petty
cash fund is used to pay relatively small
amounts.
 Operation of the fund, often called an imprest
system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
 Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.
ESTABLISHING THE FUND
GENERALJOURNAL
Date
Account TitlesandExplanation
Mar. 1 PettyCash
Cash
Toestablishapettycashfund.
Debit Credit
100
100
When the fund is established, a cheque
payable to the petty cash custodian is issued
for the stipulated amount.
REPLENISHING THE FUND
GENERAL JOURNAL
Date
Mar. 15
Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.
Debit
Credit
44
38
5
87
On March 15 the petty cash custodian requests
a cheque for $87. The fund contains $13 cash
and petty cash receipts for postage, $44, freight
out, $38, and miscellaneous expenses, $5.
REPLENISHING THE FUND
GENERAL JOURNAL
Date
Mar. 15
Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/
Debit
44
38
5
1
Credit
88
On March 15 the petty cash custodian requests
a cheque for $88. The fund contains $12 cash
and petty cash receipts for postage, $44, freight
out, $38, and miscellaneous expenses, $5.
USE OF A BANK
The use of a bank minimizes the amount
of currency that must be kept on hand and
contributes significantly to good internal
control over cash.
 A company can safeguard
its cash by using a bank as
a depository and clearing
house for cheques received
and cheques written.

BANK STATEMENTS
A bank statement
shows:
1. cheques paid and
other debits
charged against the
account
2. deposits and other
credits made to the
account
3. account balance
after each day’s
transactions
ACCOUNT W. A. LEE COMPANY
STATEMENT 500 QUEEN STREET
FREDERICTON, NB, E3B 5C2
Statement Date/Credit
Line Closing Date
April 30, 2003
457923
ACCOUNT NUMBER
Balance
Last Statement
13,256.90
Deposits and Credits Cheques and Debits Balance
No. Total Amount
Total Amount This Statement
20
34,805.10
26
32,154.55
15,907.45
DEPOSITS AND
CREDITS
Date
Amount
DAILY BALANCE
Date
Amount
4-2
435
644.95
4-5
436
3,260.00
4-4
437
1,185.79
4-3
438
776.65
4-8
439
1,781.70
4-7
440
1,487.90
4-8
441
2,420.00
4-11
442
1,585.60
4-12
443
1,226.00
=================
4-29
NSF
425.60
4-29
459
1,080.30
4-30
DM
30.00
4-30
461
620.15
4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60
4-2
16,888.80
4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45
Symbols:
Error Correction
CHEQUES AND DEBITS
Date
No.
Amount
CM
Credit Memo EC
DM
Debit Memo
INT Interest Earned
NSF
Not Sufficient Funds Reconcile Your
SC
Service Charge
Account Promptly
RECONCILING THE BANK ACCOUNT


Reconciliation is necessary because the
balance per bank and balance per books
are seldom in agreement due to time lags
and errors.
A bank reconciliation should be prepared
by an employee who has no other
responsibilities pertaining to cash.
Terms
 Deposits in transit
 Deposits recorded by depositor that have not
been recorded by bank
 Outstanding cheques
 Cheques written (issued) and recorded by
company that have not been presented
to/paid by bank
 Adjusted balance
 Reconciled or correct cash balance
Terms

Debit memoranda
 Charges against depositor’s account (e.g.
service charges, RC (returned)/NSF
(insufficient funds) cheques)

Credit memoranda
 Amounts that increase depositor’s account
(e.g., interest earned)
Bank Reconciliation
Procedures
$ Per Bank
Statement
-outstanding cheques
+deposits in transit
+/- bank errors
= correct cash
amount
$ Per Books
-NSF cheques
-cheque printing or
other service charges
+notes collected by
bank
+/- book errors
Illustration 8-11
Reconciling Journal Entries

Books
 Each reconciling item in
determining the adjusted
balance per books MUST be
journalized and posted

Bank
 Do NOT journalize any entries
on bank side
REPORTING CASH
Cash reported on the Balance Sheet
includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
 Cash is listed first in the balance sheet
because it is the most liquid asset.

CASH EQUIVALENTS


Cash equivalents are highly liquid
investments, with maturities of three
months or less when purchased, that
can be converted into a specific amount
of cash.
Examples include money market funds,
short-term notes, and treasury bills.
USING THE INFORMATION IN THE
FINANCIAL STATEMENTS
Most important asset
 Pervasive impact
 Vulnerable to theft or
misuse
 Balancing act
needed to ensure
sufficient, but not
excess, quantity

USING THE INFORMATION IN THE
FINANCIAL STATEMENTS
Cash Flow Statement : shows where
cash came from and what is was used
for.
 Management report: states
management’s responsibility for internal
controls.
