Accounting and Finance Essentials

1. Accounting and Finance Essentials Presented by Bill Moylan

2. Adjusting Entries

3. Adjusting Entries • We want to match expenses with revenues earned from those expenses (as closely as possible). • Remember the “Accrual Concept”?

4. The Accrual Concept • Revenues are recognized when they are earned, and expenses needed to earn the revenues must be matched with them. • This is different than “cash” accounting.

5. Common Adjusting Entries • Depreciation • Prepaid Expenses • Accrued Liabilities

6. Depreciation • Expensing a major asset over a number of years (“useful life”) • Cars, Trucks, Office Equipment (3-5 years) • Land improvements (15 years) • Buildings (varies, but often 20-30 years) • Land ???

7. Prepaid Expenses • Things you have paid for in advance but have not had the use of • Rent • Lawyer Retainer • Consulting contract

8. Accrued Liabilities • You have received benefit, but you haven’t paid for it yet

9. Depreciation • Let’s say we buy a piece of equipment with a 4-year useful life for $40,000 • How much do we expense each year? • $10,000

10. Depreciation • Straight-line depreciation (SL) • Double Declining Balance (DDB) • Sum of the Years Digits (SOYD)

11. Straight-line • Divide by # of years; all depreciation expenses are equal • 4 year useful life: 25% per year • $40,000 x 25% = $10,000/year • Simple “depreciation schedule”

12. Straight-line

13. DDB Depreciation • DOUBLE the straight-line amount • Use that on the Net Asset Value • 25% x 2 = 50% • $40,000 x 50% = $20,000 (in year one) • N.A.V. = $20,000 • $20,000 x 50% = $10,000 (in year two) • A little more complicated “depreciation schedule”

14. DDB Depreciation

15. SOYD Depreciation • Start with useful life • Use years remaining, divided by the total sum of the years’ digits

16. SOYD Depreciation • Start with useful life • Use years remaining, divided by the total sum of the years’ digits

17. Let’s Compare Schedules

18. Which Would We Prefer? • Let’s go to the spreadsheets