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1
CHAPTER 1
BASIC FINANCIAL ACCOUNTING REVIEW
INTRODUCTION
This chapter reviews basic accounting principles and procedures. It is a necessary chapter for
those whose accounting background is poor. If students have recently completed an introductory
accounting course, this chapter could be omitted, or assigned for self review. Chapters 1 and 2
lay the foundation for most of the remaining chapters in the textbook.
TRUE OR FALSE QUESTIONS
(Correct answer indicated by T for True answers and F for False answers)
1. Accounting principles and concepts are broad rules developed to create a common
language used by accountants.
T
2. A business owner’s personal assets should be included with the assets of the business
entity.
F
3. The cost principle of valuing assets may not indicate the true value of the assets as time
goes by.
T
4. Accrual accounting is based on the principle of matching sales revenue with expenses.
T
5. Cash basis accounting is never used in business.
F
6. The full-disclosure principle states that all accounting records should be available at
any time to anyone who wants to look at them.
F
7. Changing depreciation methods from one period to the next would not conform to the
principle of consistency.
T
8. The materiality of a particular transaction may need to be considered in deciding
whether or not to conform to other accounting principles.
T
9. Depreciation is a method of allocating the cost of a long-lived asset to an expense over
the life of the asset.
T
10. Straight-line depreciation allocates the cost of a long-lived asset in equal units of time
over the life of the asset.
T
11. Assets plus liabilities equal ownership equity.
F
12. Sales revenue − Cost of sales = Gross Margin.
T
13. The term operating income identifies operating income before income tax.
T
14. Assets − ownership equity equals liabilities.
T
15. Double-entry-accrual accounting ensures the balance sheet equation is always kept in
balance, as long as no errors are made in recording and posting transactions.
T
2
16. The debit side of a ledger account is always the left column. It is used to post debit
values of a transaction.
T
17. A debit entry to a debit balanced ledger account will decrease the balance of the
account.
F
18. A credit entry to a credit balanced account will increase the account balance.
T
19. An expense account carries a normal debit balance.
T
20. A trial balance showing the total of the debit and credit balanced accounts are equal at
the end of an accounting period indicates all entries have been correctly posted.
F
21. Adjusting entries are normally necessary at the end of an accounting period to conform
to the matching principle.
T
22. Beginning inventory + Purchases − Ending inventory = Cost of goods sold.
T
23. A sales revenue account is debit balanced.
F
24. The portion of a prepaid account to be expensed will require a debit to the prepaid
account and a credit to an expense account.
F
25. End of period adjusting entries is recorded in a journal before the adjustments are
posted to the ledger accounts.
T
MULTIPLE CHOICE QUESTIONS
(Correct answers indicated by asterisk)
1. A cocktail lounge owner who takes home liquor for private parties at home without reflecting
this in the lounge’s accounting records is violating the:
(a) Matching principle
(b) Going concern concept
2. A restaurant that records all purchases of food and beverages as an expense at the time of
purchase and does not consider the end of period inventories would be violating the:
(a) Cost principle
(b) Materiality concept
3. The cost principle is concerned with:
(c) Valuing long-lived assets at their current market value rather than at cost
(d) Setting menu prices at a certain mark-up over cost
3
4. The balance sheet equation can be expressed as:
(a) Assets = Liabilities + Owners’ equity
(b) Assets − Liabilities = Owners’ equity
5. A restaurant purchased a new point of sale terminal by paying one-half of its cost in cash and
owing the balance on account. The journal entry requires a:
(c) debit to an asset, a debit to a liability, and a credit to a liability
(d) debit to two assets and a credit to a liability account
6. The length of the period of an accounting cycle is:
(c) Monthly for all hospitality enterprises
(d) Quarterly for a resort hotel
7. If cash was paid for a two-year $3,600 insurance policy on July 1, the amount of the
insurance expensed on December 31 is:
(c) $2,700
(d) $ 600
8. A five-year depreciable asset cost $10,000 and had a residual value of $1,000. What is the
balance of its accumulated depreciation account at the end of two years using straight-line
depreciation?
(a) $6,000
(b) $4,000
9. Which of the following is correct?
(a) Debits decrease assets
(b) Debits decrease assets; credits increase liabilities
10. Cost of goods sold is calculated as:
(c) Beginning inventory − Ending inventory − Purchases
(d) Beginning inventory + Ending inventory + Purchases
4
11. The normal balance of each of the five basic categories of balance sheet and income
statement accounts are either debit or credit balanced. Which of the following is not correct?
(c) Expense: A debit balanced account
(d) Asset: Debit balanced account
12. The inflow of assets as a result of business operations occurs from:
(a) A capital investment
(b) Borrowing through long-term debt
13. The posting of a transaction refers to:
(c) Comparing postings from the general journal to the ledger accounts
(d) Recording transactions in a general journal
14. The outflow of assets as a result of business operations are called:
(c) Ownership equity
(d) Receivables
15. A restaurant purchased an ice machine for $4,000 paying $1,000 in cash with the balance
carried on account. The journal entry to record this transaction is which of the following?
(c) Debit equipment $1,000, credit accounts payable $3,000
(d) Debit equipment $3,000, credit cash $4,000
16. A ledger shows:
(a) A chronological record of all accounting transactions
(b) A balance of all balance sheet accounts
EXERCISE SOLUTIONS
E1.1 a. The Full Disclosure principle
b. The Full Disclosure and the Consistency principles
5
E1.2 Write a short explanation of the following terms:
a. Operating Income: Describes income before income taxes when sales revenue is
greater than total costs.
E1.3 Identify the normal balance as Debit or Credit for each of each the following:
Ownership
Sales
Operating
Account:
Assets
Liabilities
Equity
Revenue
Expenses
Balance:
Debit
Credit
Credit
Credit
Debit
E1.4 Write the abbreviated linear equation for the balance sheet and income statement.
E1.5 At the end of an accounting period, it was determined that wages of employees $858 and
management salaries $1,400 have been earned. Journalize the entry to accrue the wages
E1.6 A restaurant reported the following for the first quarter of year 0007: Sales revenue (SR)
of $420,680, cost of sales (CS) $201,928, and total expenses (TE) of $175,170. Find the
E1.7 For the month of March, a restaurant reported a beginning food inventory (BI) of
$18,662, ending food inventory (EI) of $16,882 and food purchases (P) for resale was
6
E1.8 Restaurant had $8,480 supplies on hand at the beginning April. During the month
$11,222 of supplies was purchased. At the end of the month a check of the supplies
indicated that $8,104 of supplies was on hand. Determine the amount of supplies used
E1.9 Equipment was purchased for $70,468. The equipment is estimated to have a serviceable
life of 8 years and a residual value of $2,500. Using straight-line depreciation, answer the
following:
E1.10 A new van was purchased for $40,000 and was estimated to have a life of 4 years or
110,000 miles; trade in (residual) value is estimated to be $4,800. In the first year, the
van was driven for 27,500 miles. a. Use the units-of-production method to determine
E1.11 Equipment was purchased for $46,400 with an estimated life of 8 years and a residual
value of $4,000. What is depreciation expense for the first year, a. Using Sum of the
8/36 × ($46,400 − $4,000) = 8/36 × $42,400 = $9,422.22 $9,422
7
E1.12 A restaurant paid $9,120 cash in advance for liability and casualty insurance for two
years of coverage:
a. Journalize the transaction for the prepaid.
Account Titles
Debit
Credit
Prepaid Insurance
$ 9,120
Cash
$ 9,120
b. What is the insurance expense for one year and for one month?
Prepaid cost / Prepaid life (years) = Insurance expense per year
$9,120 / 2 years = $4,560 per year
Prepaid cost / Prepaid life (months) = Insurance expense per month
$9,120 / 24 months = $380 per month
c. Record journal entry for six months of insurance expense
Account Titles
Debit
Credit
Insurance Expense (6 × $380)
$ 2,280
Prepaid Insurance
$ 2,280
E1.13 Referring to the journal entries you completed for E1.12 (a) and (c), name and post the
journal entries using the modified T account format as shown below.
Name: Cash
Name: Prepaid Insurance
Name: Insurance Expense
Debit
Credit
Balance
Debit
Credit
Balance
Debit
Credit
Balance
(Beginning
Balance)
$24,400
(Beginning
Balance)
$ -0-
(Beginning
Balance)
$ -0-
$9,120
15,280
$9,120
9,120
$2,280
$2,280
$ 2,280
6,840
E1.14 A business using the cash basis of accounting cannot locate all of its records for one
month of operations. Beginning cash $22,260, ending cash $18,388, and cash payments
were $162,800. Determine the unknown cash sales revenue:
Beginning Cash
Cash
+
Cash Sales?
−
Cash Payments
=
Ending Cash
$22,260
+
Unknown?
–
$162,800
=
$18,388
Reverse the functions of (+) and (−) beginning with Ending Cash
Ending Cash
+
Cash Payments
–
Beginning Cash
=
Cash Sales?
$18,388
+
$162,800
–
$22,260
=
$158,928
Proof
Beginning Cash
+
Cash Sales
−
Cash Payments
=
Ending Cash
$22,260
+
158,928
–
$162,800
=
$18,388
E1.15 A restaurant pays $10,800 in advance for six months’ building rent in advance and
recognizes rental expense every month.
a. What is the monthly rental expense?
9
g. Owner purchased supplies for $2,650 cash.
Account Titles
Debit
Credit
Supplies
$ 2,650
Cash
$ 2,650
h. Owner purchased $3,800 of food inventory on account.
Account Titles
Debit
Credit
Food Inventory
$ 3,800
Accounts Payable
$ 3,800
i. Owner paid $2,700 for a one-year liability and casualty insurance policy.
Account Titles
Debit
Credit
Prepaid Insurance
$ 2,700
Cash
$ 2,700
j. Employees were paid wages $12,800 and salaries $2,400.
Account Titles
Debit
Credit
Wages Expense
$ 12,800
Salaries Expense
2,400
Cash
$ 15,200
cards, and 2% on accounts receivable.
Account Titles
Debit
Credit
Cash
$ 38,520
Credit Card Receivables
3,424
Accounts Receivable
856
Sales Revenue
$ 42,800
l. Owner paid $16,600 on accounts payable.
Account Titles
Debit
Credit
Accounts Payable
$ 16,600
Cash
$ 16,600
m. Owner paid $8,000 on note payable, plus interest of $960.
Account Titles
Debit
Credit
Notes Payable
$ 8,000
Interest Expense
960
Cash
$ 8,960
10
P1.1, Part 2: Solution posting journal entries to the General Ledger.
Cash
Prepaid Insurance
Debit
Credit
Balance
Debit
Credit
Balance
(a) $ 60,000
$ 60,000
(i) $ 2,700
$ 2,700
(b) 30,000
90,000
(c) $ 18,000
72,000
Supplies
(d) 16,000
56,000
Debit
Credit
Balance
(e) 30,400
25,600
(g) $ 2,650
$ 2,650
(f) 3,800
21,800
(g) 2,650
19,150
Equipment
(i) 2,700
16,450
Debit
Credit
Balance
(j) 15,200
1,250
(d) $ 46,000
$ 46,000
(k) 38,520
39,770
(l) 16,600
23,170
Furnishings
(m) 8,960
$ 14,210
Debit
Credit
Balance
(e) $ 30,400
$ 30,400
Credit card Receivables
Debit
Credit
Balance
Accounts Payable
(k) $ 3,424
$ 3,424
Debit
Credit
Balance
(d) $ 30,000
$ 30,000
Accounts Receivable
(f) 3,200
33,200
Debit
Credit
Balance
(h) 3,800
37,000
(k) $ 856
$ 856
(l) $ 16,600
$ 20,400
Food Inventory
Notes Payable
Debit
Credit
Balance
Debit
Credit
Balance
(f) $ 3,200
$ 3,200
(b) $ 30,000
$ 30,000
(h) 3,800
$ 7,000
(m) $ 8,000
$ 22,000
Beverage Inventory
Capital, (OE)
Debit
Credit
Balance
Debit
Credit
Balance
(f) $ 3,800
$ 3,800
(a) $ 60,000
$ 60,000
Prepaid Rent
Sales Revenue
Debit
Credit
Balance
Debit
Credit
Balance
(c) $ 18,000
$ 18,000
(k) $ 42,800
$ 42,800
Salaries Expense
Debit
Credit
Balance
(j) $ 2,400
$ 2,400
Interest Expense
Debit
Credit
Balance
Wages Expense
(m) $ 960
$ 960
Debit
Credit
Balance
(j) $ 12,800
$ 12,800
11
P1.1, Part 3: Solution: Unadjusted Trial Balance
March 31, 0006
Debit
Credit
Cash
$ 14,210
Credit card receivables
3,424
Accounts receivable
856
Food inventory
7,000
Beverage inventory
3,800
Prepaid rent
18,000
Prepaid insurance
2,700
Supplies
2,650
Equipment
46,000
Furnishings
30,400
Accounts payable
$ 20,400
Note payable
22,000
Capital (OE)
60,000
Sales revenue
42,800
Wages expense
12,800
Salaries expense
2,400
Interest expense
960
Unadjusted Trial Balance
$145,200
$145,200
P1.2 Solutions, Adjusting Journal Entries (single compound entry)
Account Titles
Debit
Credit
(a) Wages expense
$ 2,877
Salaries expense
1,400
Payroll payable
$ 4,277
(b) Rent Expense
$ 8,800
Prepaid Rent
$ 8,800
(c) Depreciation Expense
$ 10,700
Accumulated Depreciation: Equipment
$ 4,900
Accumulated Depreciation: Furnishings
5,800
(d) Insurance expense
$ 4,000
Prepaid insurance
$ 4,000
(e) Supplies Expense
$ 1,218
Supplies Inventory
$ 1,218
(f) Interest Expense
$ 436
Interest Payable
$ 436
12
P1.3 Part 1: Solutions, Journal Entries.
a. Owner invested $250,000 cash deposited in the business bank account.
Account Titles
Debit
Credit
Cash
$ 250,000
Capital
$ 250,000
b. Owner paid $108,000 cash for land.
Account Titles
Debit
Credit
Land
$ 108,000
Cash
$108,000
c. Owner borrowed $300,000 on a mortgage payable.
Account Titles
Debit
Credit
Cash
$ 300,000
Mortgage Payable
$ 300,000
d. Owner paid cash for a building, $285,400.
Account Titles
Debit
Credit
Building
$ 285,400
Cash
$ 285,400
e. Equipment was purchased for $48,000, paying $12,000 cash, and the
balance owed on a note payable.
Account Titles
Debit
Credit
Equipment
$ 48,000
Cash
$ 12,000
Notes Payable
36,000
f. Furnishings were purchased for $120,000 cash.
Account Titles
Debit
Credit
Furnishings
$ 120,000
Cash
$ 120,000
g. Linen inventory was purchased for $7,894 cash.
Account Titles
Debit
Credit
Linen Inventory
$ 7,894
Cash
$ 7,894
h. Supplies were purchased $3,200 of supplies on account.
Account Titles
Debit
Credit
Supplies
$ 3,200
Accounts Payable
$ 3,200
13
i. Vending inventory was purchased for $540 cash.
Account Titles
Debit
Credit
Vending Inventory
$ 540
Cash
$ 540
j. Room sales revenue during the month was $58,740; 98% cash and
2% credit cards receivable.
Account Titles
Debit
Credit
Cash
$ 57,565
Credit card receivables
1,175
Room Sales Revenue
$ 58,740
k. Vending sales revenue from vending machines was $880 cash.
Account Titles
Debit
Credit
Cash
$ 880
Vending Sales Revenue
$ 880
l. Wages of $3,120 cash were paid.
Account Titles
Debit
Credit
Wages Expense
$ 3,120
Cash
$ 3,120
m. Owner paid $3,200 cash on accounts payable.
Account Titles
Debit
Credit
Accounts Payable
$ 3,200
Cash
$ 3,200
n. Owner paid $4,200 annual casualty and liability insurance policy.
Account Titles
Debit
Credit
Prepaid Insurance
$ 4,200
Cash
$ 4,200
o. Owner paid $1,600 on the mortgage payable and interest of $1,728.
Account Titles
Debit
Credit
Mortgage Payable
$ 1,600
Interest Expense
1,728
Cash
$ 3,328
14
P1.3, Part 2: Solution, posting journal entries to the general ledger.
Cash
Equipment
Debit
Credit
Balance
Debit
Credit
Balance
(a) $250,000
$250,000
(e) $ 48,000
$ 48,000
(b) $ 108,000
142,000
(c) $300,000
442,000
Furnishings
(d) 285,400
156,600
Debit
Credit
Balance
(e) 12,000
144,600
(f) $ 120,000
$ 120,000
(f) 120,000
24,600
(g) 7,894
16,706
Accounts Payable
(i) 540
16,166
Debit
Credit
Balance
(j) 57,565
73,731
(h) 3,200
$ 3,200
(k) 880
74,611
(m) $ 3,200
$ -0-
(l) 3,120
71,491
(m) 3,200
68,291
Mortgage Payable
(n) 4,200
64,091
Debit
Credit
Balance
(o) 3,328
60,763
(c) $ 300,000
$ 300,000
Credit Card Receivables
(o) $ 1,600
$ 298,400
Debit
Credit
Balance
(j) $ 1,175
$ 1,175
Notes Payable
Debit
Credit
Balance
Vending Inventory
(e) $ 36,000
$ 36,000
Debit
Credit
Balance
(i) $ 540
$ 540
Capital (OE)
Debit
Credit
Balance
Prepaid Insurance
(a) $ 250,000
$ 250,000
Debit
Credit
Balance
(n) $ 4,200
$ 4,200
Room Sales Revenue
Debit
Credit
Balance
Supplies
(j) $ 58,740
$ 58,740
Debit
Credit
Balance
(h) $ 3,200
$ 3,200
Vending Sales Revenue
Debit
Credit
Balance
Linen Inventory
(k) $ 880
$ 880
Debit
Credit
Balance
(g) $ 7,894
$ 7,894
Wages Expense
Debit
Credit
Balance
Land
(l) $ 3,120
$ 3,120
Debit
Credit
Balance
(b) $ 108,000
$ 108,000
Interest Expense
Building
Debit
Credit
Balance
Debit
Credit
Balance
(o) $ 1,728
$ 1,728
(d) $ 285,400
$ 285,400
15
P1.3 Part 3: Solutions, Adjusting Journal Entries (separate entries for clarity).
1. The linen account balance is $7,894. Linen inventory on hand is $7,220.
$7,894 − $7,220 = $674 linen used.
Account Titles
Debit
Credit
Linen Expense
$ 674
Linen Inventory
$ 674
2. Wages earned by employees but unpaid is $416.
Account Titles
Debit
Credit
Wages Expense
$ 416
Wages Payable
$ 416
3. One month of prepaid insurance consumed ($4,200 /12) = $350
Account Titles
Debit
Credit
Insurance Expense
$ 350
Prepaid Insurance
$ 350
4. Accrued interest is 1% of note payable ($36,000 × 0.01) = $360
Account Titles
Debit
Credit
Interest Expense
$ 360
Interest Payable
$ 360
5. Equipment depreciation: ($48,000 − $3,000) / 120 mo. = $375
Account Titles
Debit
Credit
Depreciation Expense
$ 375
Accumulated Depreciation: Equipment
$ 375
6. Furnishings depreciation: ($120,000 − $7,000) / 96 mo. = $1,177
Account Titles
Debit
Credit
Depreciation Expense
$ 1,177
Accumulated Depreciation: Furnishings
$ 1,177
7. Building depreciation: ($285,400 − $42,000) / 240 mo. = $1,014
Account Titles
Debit
Credit
Depreciation Expense
$ 1,014
Accumulated Depreciation: Building
$ 1,014
Note: A compound depreciation expense entry will be used in the future.
Account Titles
Debit
Credit
Depreciation Expense
$ 2,566
Accumulated Depreciation: Equipment
$ 375
Accumulated Depreciation: Furnishings
1,177
Accumulated Depreciation: Building
1,014
9. Supplies used during the first month are $533.
Account Titles
Debit
Credit
Supplies Expense
$ 533
Supplies
$ 533
16
P1.4, Task 1: Find the total of cash payments, which are stated in the problem:
Cash Payments
Purchased truck
$ 12,000
Purchased inventories
30,280
Truck operating costs
1,024
Truck loan interest
1,280
Owner cash withdrawals
19,500
Total cash payments
$64,084
Task 2: Set up the known information in a linear statement
Beginning Cash
+
Cash Sales?
−
Cash Payments
=
Ending Cash
$15,000
+
Unknown
−
$64,084
=
$28,829
Task 3: Find the missing cash sales by reversing the linear additive functions.
Ending Cash
+
Cash Payments
−
Beginning Cash
=
Cash Sales
$28,829
+
$64,084
−
$15,000
=
$77,913
Task 4: Complete an Accrual Income Statement.
Fast Snacks
Income Statement
For the Year Ended 12-31-2006
Sales Revenue
$77,913
Cost of Sales:
Beginning Inventory
- 0 -
Purchases
$30,280
Goods Available for sale
$30,280
Less: Ending Inventory
( 624)
Cost of Sales
( 29,656)
Gross Margin
$48,257
Operating Expenses
Truck operating expenses
$ 1,024
Add: Truck expense invoice
280
Interest expense [8% × $12,000]
960
Depreciation expense [20% × $24,000]
4,800
Total Operating Expenses
( 7,064)
Operating Income (before tax)
$41,193
A proprietary form of business cannot consider assets withdrawn from the business
entity by the owner for personal use as an operating expense. Such withdrawals will
reduce owner’s equity and is shown in the balance sheet as a contra equity account.
17
P1.5, Task 1: Find total cash payments, which are stated in the problem.
Cash Payments
Marina rental [4 × $800]
$ 3,200
3,200
New boats [3 x $5,000]
15,000
Purchased inventories
8,754
Boat maintenance and fuel
1,822
Casual labor
2,400
Boat loan repayment
15,000
Interest expense [$15,000 × 0.06]
900
Owner withdrawals [4 × $1,800]
7,200
Total cash payments
$54,276
Task 2: Set up the known information in a linear statement
Beginning Cash
+
Cash Sales
−
Cash Payments
=
Ending Cash
$25,000
+
Unknown?
−
$54,276
=
$22,697
Task 3: Find the missing cash sales by reversing the additive functions.
Ending Cash
+
Cash Payments
−
Beginning Cash
=
Cash Sales
$22,697
+
$54,276
−
$25,000
=
$51,973
Task 4: Complete an Accrual Income Statement.
Income Statement
For the Period Ending 09-15-2006
Sales Revenue
$ 51,973
Cost of Sales
Purchases [$8,754 + $137 invoice]
$ 8,891
Cost of Sales
( 8,891)
Gross Margin
$ 43,082
Operating Expenses
Marina rental expense
$ 3,200
Boat maintenance and fuel expense
1,822
Casual labor expense
2,400
Interest expense
900
Depreciation expense [10% × $23,250]
2,325
Total Operating Expenses
( 10,647)
Operating Income (before tax)
$32,435
• $10,000 − $2,250 = $7,750 × 3 (boats) = $23,250 / 10% = $2,325
• Or: $10,000 − $2,250 = $7,750 × 3 (boats) = $23,250 × 10% = $2,325
• 100% / 10 = 10% straight-line depreciation rate on cost – residual; or 100% of the
amount to be depreciated divided by the life of the asset:
18
CASE 1 SOLUTION
Task 1: The missing cash sales represent Sales Revenue.
Cash Payments
Reconciliation
Purchased truck
$ 29,000
Beginning Cash Balance
$ 35,000
Inventories purchased
48,222
Add: Cash Sales
Unknown
Truck expenses
3,288
Less: Cash Payments
(109,310)
Owner withdraws
28,800
Ending Cash Balance
$ 28,318
Total cash payments
$109,310
($28,110 + $208 = $28,318)
Task 2: Set up the known information in a linear statement.
Beginning Cash
+
Cash Sales
−
Cash Payments
=
Ending Cash
$35,000
+
Unknown
−
$109,310
=
$28,318
Task 3: Find the missing cash sales by reversing the linear additive functions.
Ending Cash
+
Cash Payments
−
Beginning Cash
=
Cash Sales
$28,318
+
$109,310
−
$35,000
=
$102,628
Task 4: Complete an Accrual Income Statement.
3C Company
Income Statement
For the Year Ended 12-31-2005
Sales revenue
$102,628
Cost of Sales
Beginning inventory
- 0 -
Purchases
$48,222
Goods available for sale
48,222
Less: Ending Inventory
( 280)
Cost of Sales
( 47,942)
Gross Margin
$54,686
Operating Expenses
Truck operating expenses
$ 3,288
Add: Truck expense invoice
188
Depreciation expense [20% × $25,000]
_ 5,000
Total Operating Expenses
( 8,476)
Operating Income (before tax)
$46,210
• Depreciation: ($29,000 – $4,000) / 5 = $25,000 / 5 = $5,000
• Or: 100% / 5 = 20% straight-line depreciation rate on cost – residual; or 100% of the
amount to be depreciated divided by the life of the asset is another alternative: 100% /
5 years = 20% per year. ($29,000 – $4,000) x 20% = $25,000 x 20% = $5,000
• Accrual net income does not represent cash. Accrual accounting recognizes inflows
of sales revenue when earned and expense outflows when incurred. Non-cash
expenses include depreciation. Proprietary withdrawals are not expenses and will
reduce owner’s equity.
