Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Differences between depreciation and amortization
- Examples of each concept
- Recording amortization as an adjusting entry



Over the last four lessons we covered the main types of adjusting entries. There is actually a fifth type that we have left to cover which is adjusting entries for amortization and depreciation.

Think about it this way: there are very few assets that hold their full value over a long period of time. In order to expense the use of assets, companies must use either depreciation or amortization to prorate the use of particular assets. Adjusting entries are used to record the expense over a specific amount of time.
 
Let's first look at the difference between depreciation and amortization.



Depreciation looks at the use or consumption of a physical asset such as equipment or vehicles. An example of this would be to record the use of a piece of medical equipment over a predicted lifespan of 10 years.
 
Amortization has a much wider reach as it can represent the depreciation of either a physical asset or an intangible asset such as a patent or copyright.
 
These terms are similar enough to be used interchangeably but in financial accounting, you will likely use amortization adjusting entries more often because it covers both physical and intangible assets.
 
The main difference between the two concepts is that depreciation focuses more on capital assets while amortization covers all types of assets, thus why amortization is used more often for adjusting entries.
 
To understand how amortization works, let's review an example of how it would be recorded on a physical asset.



Let's say a construction company purchases a new truck for $60,000 to haul their equipment to and from job sites. The journal entry for the truck purchase would first be recorded by listing the vehicle as a debit and the cash expense as a credit, as shown above.

When they go to prepare their income statement for the month, they would record their revenue from performing construction services. They would record their expenses such as materials, salaries, utilities and equipment.

The one expense amount that is missing from this list of expenses is their amortization costs for the new truck. If the company doesn't record their amortization costs, their expenses will be understated on their financial statement and the net profit figure will be incorrect.
 
In order to properly record the usage of the truck for the month of August, we would need to break down the estimated lifespan of the asset. Let's say the truck is used for 6 years, which would equate to $10,000 usage per year. This figure is then divided by 12 months to come up with a monthly amortization expense of $833. This figure would then be recorded as show above.

The contra asset account is the accumulated amortization expense, which means that when this type of account increases, the assets will decrease. Remember that this type of account will always stick to the asset account to show the use of the asset by using an adjusting entry. It is the offset for the asset account.