Depreciation Methods

Depreciation, contrary to popular belief, does not measure the decline of an asset's market value nor its physical deterioration. Rather, it is the allocation of the asset's cost to its expense throughout its useful life. There are three primary methods employed by companies to calculate and produce a schedule of depreciation. These are commonly known as the Single-Line Method, Units-of-Production Method, and Double-declining-balance. Each will be described in more detail below.


Single-Line Method
The single-line method recognizes the same amount of expense to each period of the asset's useful life. The first step in this method is to calculate the cost to be depreciated, found by subtracting the salvage value from the total cost of the asset (NOTE: total cost includes ALL expenses incurred throughout the process of getting the asset ready to be put into use). Next, this cost to be depreciated is divided by the number of accounting periods in the asset's useful life.

For example, if we have purchase a tractor for $5,000 and used for the entirety of its predicted 10 year useful life when it is realized that a salvage value of $200 exists, the depreciation will be calculated as follows:

(5,000-200)/10 = $480/year


Units-of-Production Method
The Units-of-Production Method charges a different amount for each period of the useful life depending on how many units are produced - the asset's usage. There are also two steps to this process as well. The first is to find the depreciation per unit - how much the asset is to be depreciated with each unit of production - which is calculated by dividing the cost to be depreciated (described above) by the expected total units of production at the end of the asset's useful life. Next, this depreciation per unit is to be multiplied by the units produced in the specific period of needed calculation.

Example: (Consider the situation about the tractor above) This tractor is expected to mow 10,000 fields in it's useful life. In its third year, it mows 800 fields. The depreciation for the third year is computed as follows:

(5,000-200) / 10,000 = $0.48 per field
0.48 x 800 = $384 (depreciation in year 3)



Double-declining-balance Method
The double-declining-balance uses a depreciation rate that is double the straight line rate and applies it to the beginning-of-period book value of an asset. The three steps of this method are as follows:

1. Calculate Straight-line rate  (100% / useful life periods)
2. Calculate Double-declining-rate (SL rate x 2)
3. Multiply Double-declining-rate by the beginning period book value

To employ this method, it is advisable to produce a double-declining-balance schedule which charts the beginning-of-period book value, depreciation rate, depreciation expense, accumulated depreciation, and book value for each respective period of the asset's useful life. The depreciation expense of each period is subtracted from the beginning-of-period book value to find the beginning-of-period book value of the next period.



It is important to note that all of these methods will produce the same amount of total depreciation at the end of the asset's useful life will be the same. This is ensured by only depreciating as much as needed in the final period of depreciation.







With that, there are now 21 days until Christmas.

Reporting Cash Flows

At this point in my Accounting 201 class, we are preparing for the end of the semester...which means finals. Since this is an introductory level course, we are only covering certain topics that will be covered in later classes, including Finance and higher level accounting classes. Therefore, our final topics will be cash flow statements and how to analyze other financial statements.

For the subject of this blog post, I will discuss the importance and how to go about producing a report of cash flows. The statement of cash flows reports cash receipts and payments involved in operating, investing, and financing activities. These statements are especially important to a business that is monitoring and analyzing change throughout a business period or deciding whether or not to make a decision.  It will help answer the following questions:

What explains the change in the cash balance?
Where does a company spend its cash?                                 
Why do income and cash flows differ?
How much is paid in dividends?
How does a company receive/disperse its cash?
Is there a cash shortage/surplus?
(Questions derived from "Financial and Managerial Accounting: Information for Decisions" by John J. Wild)

The statement of cash flows, as mentioned, are broken into three categories, if you will: Operating, Investing, and Financing.

Operating Activities
Operating activities include transactions that ultimately determine net income. Examples include the production/purchase of inventory, sale of goods and services, and other operating expenditures. When producing this section, the accountant must also consider depreciation expense, loss/gain, current assets, and current liabilities. The majority of these factors can be found in the balance sheet and income statement. The prepared operating statement will be produced as follows:

Net Income (+) or (-)
Depreciation Expense (+)
Loss (+) or Gain (-)
Current Assets Increase (-) or Decrease (+)
Current Liabilities Increase (+) or Decrease (-)
Cash flows from operations..............................net of the above


Investing Activities
Investing activities include transactions that affect long-term assets. Specifically, these activities will be the purchase and sale of short-term investments as well as the lending and collecting of money for notes receivable. In the report, one will generally find the purchase and sale of equipment. This section will be prepared as follows:

Purchase of equipment (-)
Sale of equipment (+)
Cash flows from investing..................net of the above


Financing Activities
The financing activities include transactions that affect long-term liabilities and equity. When a company obtains cash from issuing debt and repays borrowed amounts or receives cash from or disperses cash amongst owners. This section will be prepared as followed:

Issuance of Stocks (+)
Cash Paid to Settle Notes Payable (-)
Cash Paid to Retire Bonds Payable (-)
Dividends Paid (-)
Cash flows from financing..................net of the above


As you can see, the preparation of a statement of cash flows is vital to the success of a business.






There are now only 28 days till Christmas!!!

Stocks

Stocks are often thrown around as an easy, sure fire way for anyone to make some easy money. At least, that's what I previously thought about them. In short, a stock grants an individual or group a certain amount of ownership in a corporation. Those who partake in such ownership are known as stockholders. These individuals invest cash or other assets in a corporation in exchange for common stock. The stockholder actually does have significant influence on the success of the corporation in that they elect a board of directors who directly vote on the actions the business will take. A stockholder is also known as an investor because when a corporation issues capital stock, they are seeking to obtain capital as an exchange. Therefore, investors are literally investing assets into the good of the company. 

For the sake of this blog post, I won't get too complicated, but stock can be issued in a number of ways depending on the market at that time and the value of certain stock. Stock can be issued based on its par value (an amount assigned per share by the corporation) at par, below par (discount), or above par (premium). The journal entry for such issuances involve the debit of cash or other asset along with the credit of common stock and that of an account known as "Paid-In Capital of Excess of Par Value, Common Stock" OR "Discount on Common Stock". Each of these credited accounts is dependent on the difference between the issuance price and par value. In accordance to the natural laws of accounting, the credits will always equal the credits in the exchange of stock.

Cash                              x                Cash                                                x+y             Cash                                      x+y

       Common Stock            x                Common Stock                                 x              Common Stock                        x

                                                              Paid-In Capital of Excess of             y             Discount on Common Stock      y

                                                                  Par Value, Common Stock 

Stock can also be issued with a No-Par Value, meaning that the share is not assigned a stated value. Any amount that the corporation receives is legal capital and recorded as common stock. All proceeds from the issuance is credited to a "No-Par Stock" account.

Cash                                                       x 

       Common Stock, No-Par Value             x

Lastly, no-par value stock can be issued at a stated value. When received, the proceeds become legal capital and are credited to a stated value stock account. Usually, the stated value stock is issued at an amount in excess of the stated value.

Cash                                                                                                      x+y

        Common Stock                                                                                    x

        Paid-In Capital in Excess of Stated Value, Common Stock                y

Stock is issued at par 88% of the time, at no-par 9%, and with a stated value 3% of the time. It is also important to know that a corporation can receive other assets rather than cash in exchange for stock, but it can also assume liabilities on such assets. 

That's my brief explanation of the recording of issued stocks. On that note, there are only 3 days till Christmas.

3-3A Worksheet

The following is the worksheet for Problem 3-3A.

"The name's Bond..."

Another important factor in a business' financial well-being is the issuing of bonds. Investors purchase bonds with cash after they are issued by a corporation. Essentially, a bond creates a long-term debt for a company as they borrow money. Those who purchase the bonds are considered lenders and/or bondholders.

As with most transactions, the issuing and paying off of bonds requires accurate accounting of interest that accrues throughout the bond's life until maturity. Interest is typically paid every six months (semiannually). Thus, if a corporation issues a bond to be paid at maturity in three years, it will make a total of six interest payments. Upon the maturity date of the bond, the issuer will pay the investor its final interest payment as well as the bond's principal amount.

A bondholder's claim to these interest payments is NOT a form of equity; the investor is not granted any form of the corporations ownership. Thus, the corporation that issues the bond does not make any entry to the equity accounts. Rather, upon issuing the bond, it will debit the amount of cash received and debit 'Bonds Payable'. This establishes a liability that will be paid at the bond's maturity date. When interest payments take place, the journal entry will be recorded as such with 'Bond Interest Expense' and 'Bond Interest Payable'.

Bonds can be issued with a Premium or Discount. A Premium is issued when the investor is willing to pay more than the principal amount proposed by the corporation. A discount, therefore, is issued when the investor purchases the bond at a price lower than par value. Both Discounts and Premiums are amortized accordingly at each semiannual interest payment and at the date of maturity.

Straight-Line Amortization and Effective Interest are two useful methods that effectively compute the reduction of a premium or discount throughout the life of the bond.

There is so much more to discuss regarding bonds and why they are so vital to the success of a business. As an aspiring entrepreneur, I have taken significant interest (no pun intended) in the importance of bonds. Lenders and investors are especially important to the success and survival of a start up industry. I have no interest in becoming an accountant, but I have definitely learned a lot of vital information regarding the financial endeavors and management for a business.

As of November 13, we have a new president and 42 days till Christmas.

Working on the worksheet

A few weeks ago, my professor assigned us a scenario from our workbook and instructed us to complete a worksheet with it. In the worksheet, we are to provide all of the account titles, an unadjusted trial balance, adjustments, an adjusted trial balance, the income statement, and a balance sheet. At the beginning of this semester, I would have looked at this assignment and notified my parents of my immediate withdrawal from the university. However, I took this project on with great confidence for a few reasons:

1. Accounting is easy.
          Yeah. I said it. The stereotype of this career being easy is absolutely true. Literally, all it's about is remembering a few little tips and tricks about manipulation of transactions, grabbing a calculator (or abacus if you prefer), and crunching away at some numbers until you can produce a valid number of statements regarding the business for which you account. In fact, all you really need to do is play around with Microsoft Excel until you've produced a professional looking report with some numbers and lines, and maybe even colors.
           I completed this assignment, due at the end of the semester, in a matter of roughly 30 minutes. I spent more time making style adjustments than I did actually computing and organizing data. What's magic about Excel is that it does the work for you.

2. Accounting is fun...relatively speaking.
          Who doesn't love playing with numbers. As lame as it sounds, accounting is just a matter of making sure everything matches up (or at least makes sense). This is really cool, especially in that this concept is vital in the coherency and accuracy of a worksheet. For example the debits and credits on the unadjusted and adjusted trial balances had to equal; the difference between total debits and credits on the income statement gives you the net income or loss; and the difference between debits and credits on the balance sheet also gives you net income or loss. [The contrast between balance sheet and income statement net income or loss is that the balance sheet is a reflection of that business' current financial standing as an aggregative report of previous periods' retained earnings and other permanent accounts (see previous posts) while the income statement is more often referred to as the observed result from a period's revenues and expenses.]
           So yes, accounts are just professional number crunchers, but I think that's totally cool. Numbers don't make sense to everyone, so if you can get the rules and regulations of accounting down, you can easily earn your CPA and PEOPLE WILL GIVE YOU MONEY to, if relative, have fun playing with numbers!

3. I have confidence in what I have learned about accounting thus far.
          I have recently been able to say with complete honesty that I have learned more from this class and my economics class than I did in my four years of high school combined. I'm not just saying this as a typical teen who said "screw high school"; I have legitimately learned so much and feel like the world of business is the place for me and my career. In fact, I have become so eager and excited to take on my own business, that I have neglected to focus on my other, far less important classes such as biology and French culture (in both of which I have an A...no worries) and have immersed myself as fully as I can in everything business.
           That being said, this passion that I have developed has made learning very easy. I wouldn't say it's very fun reading my accounting textbook, but I always feel so satisfied when I can put what I've learned into practice and build upon it over time. And because everything builds on everything else, I am pretty much always confident in what I am doing.

So, I'm not telling my group that I've already done the project because I don't want them just taking the answers. But I'll be a good sport and help them out.




The next time I write, we will have a new president. If you read this before November 8, let's vote to make America great again, for the sake of the business world if nothing else.


FYI....49 days till Christmas.

Economists vs Accountants (profit)

I am an economics student at the University of Louisville. Why? Because I love business. Well, actually, because I disliked the idea of becoming an engineer. See, I originally went to UL as a mechanical engineer major, but about 2 months before classes started, I gave my future a little thought and decided that these hands weren't made to be an engineer. Rather, I have been given the mind to pursue business and entrepreneurial endeavors.  That being said, understand that although I have a bias towards the practice of economics, the following is not a persuasive argument about which practice is better. Instead, I am just going to give you a few examples of how they are slightly (very) different in their ways of analyzing business.

Profit is calculated in a way that yield very different results, usually with accounting recognizing an overstatement of profit due to an understatement of expense. Expenses can be broken down into two primary categories: EXPLICIT and IMPLICIT. Explicit costs are the more obvious, cash/asset-related expenditures that the company partakes in order presumably to increase revenue. Implicit costs, however, is generally known as OPPORTUNITY COST, what you give up in order to produce x number of units. If you have looked into either accounting or economics at least a little, it should be clear based on these definitions which practice analyzes which costs. Well, accounting only uses explicit, monetary, costs in their computation of profit. Economics uses both explicit and implicit. Profit in general is computed by subtracting expenses from your total revenue. The processes for both practices are as follows:

Economics      Profit = Total Revenue - Explicit Costs - Implicit Costs
Accounting     Profit = Total Revenue - Explicit Costs

This difference will, more often than not, produce recorded profits that are strikingly different. For example, assume Company A had a good year of sales and made $200,000 in total revenue. Throughout the year, they purchased $150,000 worth of equipment (an explicit cost), but had observed an opportunity cost of $60,000 (an implicit cost). Well, the accounting profit would be $50,000 and the economic profit would be -$10,000. As you can see, these numbers are totally different, as the economic profit was actually negative, meaning the company lost money.

Here's another example, assume Company A had total revenue of $200,000 and that they noted $170,000 worth of explicit costs and $30,000 of implicit costs. The accounting profit would be $30,000 while the economic profit would be $0. Typically, a profit of $0 seems bad, but this is actually considered a success in the business world and is known as NORMAL PROFIT, meaning you didn't lose anything. Good job, Company A.

Many other differences exist, but when it comes down to it, comparing accountants and economists is like comparing apples to oranges; they both provide a way to examine and manipulate business strategies based on statistics and trends over a certain financial period. Both are important (utterly vital) to the life of a company and must be utilized efficiently in order to guarantee survival in the world of business.

To close, I'd like to note that Christmas is only 54 days away as of November 1.

Liabilities: accounting yourself accountable

In the world of business, many companies will accept payments before providing service or delivery. Likewise, some may accept a good or service before they submit a payment. In both of these cases, the party acquiring unfulfilled obligations would partake in the recording of what is known as a LIABILITY.

A liability is basically obligations held by a company. It can also be referred to as a creditor's claim on an asset; a source of the company's assets; or even a creditor's claim against the assets currently held by the company. Nonetheless, a company must record each liability acquired within an accounting period as it directly affects the balance sheet at any point in time. It is relevant now to refer to the accounting equation:

Assets = Liabilities + Equity     ---------->     Liabilities = Equity - Assets

Note that an increase in liabilities yields an increase in assets as is reflected in the balance sheet.

Liabilities have a normal credit balance, thus are decreased when recorded as a debit. There are many different forms of liabilities, but many can be spotted by two key words: "UNEARNED" and "PAYABLE". Other common liability accounts include, but are not limited to, the following:

Notes Payable
Accounts  ""
Wages  ""
Salaries  ""                    
Notes  ""
Interest  ""
Unearned Revenue
Fees Unearned

It is pretty easy to spot a liability on a balance sheet, and this is to the benefit of all entities involved in a particular transaction. The sooner one party fulfills its obligations/liabilities to another, the sooner both can resume normal business practices.

As liabilities are accrued, they are recorded as a credit. Inversely, as they are fulfilled, they are reduced by being recorded as a debit. An example of this is provided:



Assume that on May 4, Company X buys a TV at a cost of $500 on credit from Tele Co. Company X would record the transaction in the journal as follows:

May 4           Television                                                 500
                                 Accounts Payable - Tele Co                  500

Now assume that on June 1, Company X pays the $500 in cash to Tele Co. (and that Tele made this sale in on Craigslist where no sales tax or interest rates applied). Company X would record the transaction as follows:

June 1           Accounts Payable - Tele Co.                    500
                                  Cash                                                      500

The ledger for the ACCOUNTS PAYABLE account would appear as follows:

Accounts Payable         In this case, since the account payable is completely fulfilled, the balance
   500     |    500              in the account as of June 1 is $0.
              |     0


On the flip side, a company can receive payment before providing service. This case is presented below:


Assume that on Jan. 1, Company X receives $500 cash for a tutoring service that is to take place over the next 5 months ($100/month) and is to start immediately. Company X would prepare this journal entry on Jan. 1:

Jan. 1        Cash                                                 500
                         Unearned Tutoring Fees                  500

On March 1, Company X has provided 2 months of service (worth $200) and will record the following journal entry:

March 1          Unearned Tutoring Fees             200                             Note that revenue is recorded
                                   Tutoring Revenue                    200                      when earned!!!


As a result of this entry, the company can recognize that 2 months' worth of tutoring revenue has been earned. Also, by analyzing an u[dated ledger, it will assure that 3 more months of service must be provided in order to earn the full revenue of $500.


A final note, business would not exist without liabilities... think about that this week.







Another final note...63 days till Christmas!

Holding Accounting Accountants Accountable

To all accountants out there: why?

As if you haven't gotten this question before, right? "Why would you want to be an accountant? All you do is add and subtract? ...debits and credits... It's so boring ...overpayed..." As a freshman Economics student who has no desire of becoming an official accountant, I cannot provide a reasonable reasonable response to the public onslaught of attacks against the career of accounting. What I can do, however, is heap some more unbiased coals onto the fire of the debate.

The following information is meant to provide some insight as to how important accounting is and how a few legal mixups can really screw things up. 

Many laws and acts have been implemented to make sure that companies prepare and present financial information in a certain manner so that no party can, in a prefect world, utilize loop holes in the accounting process. The Sarbanes-Oxley Act (SOX) and Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the GAAP, SEC,  IASB, IFRS, and FASB (whose names are easy to find with a quick web search) are all proponents and enforcement acts/organizations that assure the clear objective of maintaining valid and consistent measurements in transactional recognitions across businesses as they adhere to a full-disclosure model of financial records presentation. Simply put, businesses - both service and not-for-profit organizations - must follow an extensive set of rules and guidelines regarding to the ways in which they prepare and present their financial statements. For more information on specific principles on this matter, consider visiting IFRS.com, FASB.org, and ifrs.org.

Now, these rules are important for a few reasons:

1. Making a mistake at any point in time - be it a legal or mathematical or logistical error - can be         costly in a future financial period. 

2. Financial fraud can result in disputes that ultimately destroy a company if not resolved quickly.

3. Failure to account for certain transactions correctly can result in an incorrect adjustment of management that may not benefit the business.

4. YOU WILL LOSE MONEY IF YOU CAN'T PLAY BY THE RULES! People are out looking to sue; that's where the real business is.

5. CEOs and CFOs will look to YOU (the accountant) if a financial mishap is afoot.

6. Most of all, these rules prevent accountants from being in the wrong...because accountants hate nothing more than the mere possibility of being wrong; they are the elite statisticians who can manipulate addition and subtraction like no other, and should be recognized as such. Math is never wrong, and neither are accountants.

I know this isn't much, but one cannot deny the risks of being an accountant. Accounting is the backbone of a business's financial status in the world and the organization that allows for innovation and implementation. Moreover, when proficient accounting is not part of the picture, the business will undoubtedly fall apart.

Accounting aside, there are now 70 days until Christmas as of October 16. 

"It is what it is...that's why."

So there I was, sitting in my first accounting class, and the professor comes in and start talking about debits, credits, journal entries, ledgers, Spongebob, and Amish cookies. I sat in complete and utter confusion at the very mention of these seemingly foreign accounting terms. Previously, I had assumed debits were good and credits were bad. Why? I don't know. I left the class with a stark realization: I was ignorant. I went back to my dorm and stared at the wall, remarking to my roommate that I would be committing the coming months to learning a third language: that of the accountant. Thus my endeavor began...

Debits and credits.

I open my textbook and thumb through a few pages, writing down what I found to be important terms. After what seemed like hours of reading, I attempted a practice question - I believe it was just a simple journal entry. Anyways, despite the time I had spent reading, I had missed the most basic concept in accounting: debits vs. credits. I remember my professor stressing these terms in class, labeling them as simply "left" and "right", respectively, but I still couldn't grasp why they are the way they are. The professor dressed this in what I legitimately believe to be the most accurate description of accounting possible: "It is this way, because somebody said it was to be, so we accepted it" (paraphrased). That's about right.

To be more specific, debits and credits comprise the general method by which transactions are recorded in a way that increases or decreases an account. Common types of accounts are as follows:
ASSETS, DIVIDENDS, and EXPENSES (which are increased by a debit) as well as LIABILITIES, EQUITY, and REVENUE (which are increased by a credit). When something is considered to be increased by either a debit or credit, it's normal balance will be considered what it is increased by (a Dr. or Cr.). This trend also works inversely, a credit will decrease the accounts that are increased by a debit, and vice versa. This may seem confusing if you've never seen these terms matched with an actual representation of the action. Here is a simple example of a debit and credit involving assets.

Company X buys a truck, which is considered an asset. To record this transaction, the company will state that the asset account was increased in the debit column by the value of the truck, also including a decrease in cash (also an asset) used to buy the truck to be recorded as a credit. The journal entry is as follows:
                                                         Dr.       Cr.      
                       TRUCK                 20,000
                                    CASH                   20,000

You will notice that there were two entries recorded above; this is known as a DOUBLE-ENTRY. A double-entry system requires that any transaction be recorded in at least two accounts. As exemplified, one account will be debited while the other(s) being credited, so as to either increase or decrease the accounts accordingly.

For those who are new to accounting, like myself, I would recommend diving into a textbook and watching YouTube videos. Simple repetition of terms will also be an effective method of remembering how to go about handling the recording of transactions with debits and credits. I have read about 350 pages of my textbook in just a few short weeks, and plan on reviewing and reading more so that I may no longer be ignorant of the art of accounting.

A final note, this stuff is pretty easy, and as my professor reminds us weekly, "people will give you money...and lots of it" if you learn to love accounting. Let's just say I'm still learning (I'm and ECON major with no clue what I can do with it. Accounting might be calling my name...).

Here's a haiku I wrote:

I debited cash,

What a joyous transaction.

Then, 'twas credited.

It's beginning to look like...the end of a fiscal year.

For some reason, a typical accounting textbook will consider a natural business year to consist of 360 days. This just doesn't make sense. Since I am not going to be an accountant, I will not accept this notion of taking away days from my year. However, the number of days in a year is very important to the accounting process at the end of a fiscal year for a business. Typically, December 31 is the end of a fiscal year/period, although a business may choose whatever day it so desires. They may also break the year up into different accounting periods, normally being broken into quarters. No matter, the end of a period or fiscal year is a very exciting time for a business because this is when they can truly analyze their success or progress over time. When this time rolls around, accountants isolate themselves into a confined area, lit only by a computer screen displaying Microsoft Excel, where they will spend a few hours, days, or weeks closing out accounts to prepare various financial statements. Temporary accounts, such as revenues, sales, expenses, and dividends, are closed out so that they may start the next period with a balance of zero ($0). The income statement account is closed to retained earnings.

Some accounts are carried over into the next period and to be taken into consideration throughout future financial transactions and other endeavors. The balance sheet will obviously not be closed out to be zero because a company will typically continue to possess certain accounts of cash, inventory, liabilities, retained earnings, and others. These are referred to as permanent accounts. These account balances at the end of the year are carried over and documented as the beginning balance for the next period.

Sometimes, adjusting entries must be made to ensure that the financial statements accurately represent the revenues and expenses accumulated over the period. The most common reasons for adjusting reasons involve unearned revenues and expired assets (such as prepaid insurance). I will also note that there are so many reasonable hypothetical situations of unrecorded expenses and earned revenues that are often unavoidable for large, and small, businesses. This is why adjusting entries are a commonality of end of year accounting.

I As a final note, I want to let all of my readers know that, as of October 4, there are only 82 days until Christmas, the best day of the year. I will begin playing Christmas music, unapologetically, starting at 80 days remaining. So to all who have read this far, I want to wish you a very Merry Christmas!

FIFO, LIFO, SI, WA, and the Key to Happiness

As a business, there are a few tricks to the trade when it comes to promoting your business as either uber-successful or relatively minuscule in the market. These methods often yield desirable household-firm relationships for the good of the business when it comes to taxes, competition, and other government enforced regulations. One important factor that determines a business' yearly transaction trends, regarding growth or decline, is the recording of inventory. This step in preparing financial statements is crucial to a business' ability to monitor sales, revenue, expenses, and the ability to produce and sell goods economically. The two major types of preparing journal entries are perpetual and periodic. These methods vary in the time at which transactions are recorded. By adopting one or the other, business can, in essence, choose what they want their yearly financial statements to say.

Furthermore, by adopting a FIFO or LIFO inventory system, a business can adjust their recording strategies based on the type of inventory they have available to sell. FIFO, meaning "First-in-first-out", is commonly employed by companies that sell perishable goods, such as dairy or other foods. This ensures a consistent flow of goods that must be taken off the shelves to the customers. LIFO, meaning "last-in-first-out", records sales based on the most recent purchases by the business. Utilizing these two different methods of recording inventory will yield completely different income statements, as well as cost of goods sold/available and ending inventory. 

Alternatively, a business may choose to employ Specific Identification or Weighted Average. The former is the most exact of the four inventory methods, as it relies on monitoring the specific cost of each individual good sold. This method does not yield different results between perpetual and periodic systems. Weighted average records, as the name implies, the average cost of goods sold/available, to assign an average cost to all goods sold. This result falls in the middle of FIFO and LIFO. 

Now on to the key to happiness. I don't know what it is, but I was hoping you'd read this far to find out. If not, sorry to disappoint. My professor, a very interesting man, is a big fan of Spongebob Squarepants, the Cookie Monster, and jazz. I believe that all accountants share this same list of interests. Please let me know if I am wrong.

Accounting 201: As of week 4...

As of today, September 14, 2016, we are in the fourth week of the Accounting 201 course at the University of Louisville under the teaching of Professor Archie Faircloth. My name is Isaac Mitchell, and I am taking this class because I am pursuing a degree in economics with minors in entrepreneurship, international business, and Spanish so that I may graduate with all the skills necessary to start and run my own business. Specifically, I am looking to move out west to establish a coffee distribution plant supported by coordinated farms, roasteries, and shops. I am slated to graduate relatively quickly, so I see this as an advantage to jump into the growing market before some of my potential competitors who I hope to make consumers of my goods and services.

Before this class, I had never even taken a business class before; I have always been intrigued by the idea of being a businessman, but it took many years to get over the stereotypes of an uptight, stickler of money and to accept the fact that I am a businessman by nature. I love the idea of buying and selling goods and services with the intent of making profit, whether tangible or intangible. I am currently in the process of starting up a small personal coaching business for runners. I have one client, but have not used any capital to start this process; thus, I have already made profit.

Accounting, at first, seemed to be a monotonous, blasé repetition of adding and subtracting. Now, I can understand why people devote a few short years of studying this to become, well, quite wealthy. The practice of accounting is stupidly simple; you literally add and subtract - based on spending and earning - to come up with reports of how successful or  unsuccessful a business/company is relative to their goals and previous trends. However, as I type this, I look to my desk where my Accounting textbook lay open to page 200 something of over 1000. This raises the question: "If accounting is so simple, why must there be such a massive publication on how to do it?" I have found that, though the overall idea of accounting is basic, the numerous and complex rules and tricks and laws and classifications and methods make this subject difficult for many to grasp.

As a committed student and aspiring businessman, I have recognized the importance of utilizing this available resource so that I may improve my knowledge on how businesses should manage their assets (specifically money) in order to yield desired results from business actions, accruing growth on a yearly basis.

At this point in the class, we have learned how to write journal entries and ledgers, how to classify transactions, how to monitor inventory, and many other things that I cannot recall at the moment. I have actually enjoyed the process thus far and look forward to learning more about the exciting world of accounting.