How do you compute a selling price if you know the cost and the required gross margin?

To compute the selling price, let’s assume that a product has a cost of $100 and the seller wants to have a 30% gross margin on its selling price, or 30% of SP. The relationship between a selling price, cost, and gross margin or gross profit is: SP - cost = gross profit or gross margin. If the gross margin is 30% of SP, the cost of $100 will be 70% of SP.

Algebra allows us to compute the selling price as follows:

SP - cost = gross margin

SP - $100 = 30% of SP

1SP - $100 = 0.3SP

1SP - 0.3SP = $100

0.7 SP = $100

0.7SP/0.7 = $100/0.7

SP = $142.85.

To verify that a selling price of $142.85 will give us the correct gross margin, we subtract the cost of $100 from the $142.85 selling price. The result is a gross profit of $42.85 which when divided by the selling price gives us the required gross margin of 30% ($42.85/$142.85 ).

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

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How is petty cash reported on the financial statements?

The Petty Cash account and its balance could be listed separately as one of the first assets in the current asset section of the balance sheet. This is likely the case at smaller companies.

At larger companies, the balance in the Petty Cash account is often combined with the balances in the other cash accounts and the total of the cash accounts will be reported as Cash or as Cash and Cash Equivalents. You will find Cash and Cash Equivalents as the first item in the current asset section of the balance sheet.

Learn more about the Balance Sheet.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

What does it mean to report expenses by function?

To report expenses by function means to report them according to the activity for which the expenses were incurred.

For a business, the reporting of expenses by function means the income statement will report expenses according to the following functional classifications: manufacturing, selling, general administrative, and financing.

For a not-for-profit organization, the reporting of expenses by function means the statement of activities will report expenses according to the following functional classifications: 1) each of its major programs, and 2) the supporting services which are a) management and general, b) fund-raising, and c) membership development.

(Classifying expenses according to salaries, electricity, repairs, etc. is referred to as natural classifications, or classifyng expenses by their nature.)

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

Comment on Replenishing Petty Cash by John

How to properly replenish petty cash has been a surce of confusion for many small business owners. As a practicing accountant, I find clients making the same mistake constantly, and it come from not understanding the full concept of petty cash. The concept is not difficult to understand; you just need to make sure you understand it.

First, think about what you are doing. You take a certain amount of money out of the bank; let’s say $100, and put it into a cash box. Remember, that the general ledger account, Cash-in-Bank, is an asset. An asset, you may recall, if you have taken my Accounting for Non-Accountants course, is an unused economic resource that your business owns (has possession or controf of). All you have done, is shift $100 from Cash-in Bank to another asset account called Petty Cash. You deplete the cash in the box when you purchase such items as postage, office supplies, meals, gas for an auto, etc. When most of the cash is gone, you must replenish the fund. You do that by withdrawing more cash from the bank for the amount that has been depleted; let’s say $92.50. You should have $92.50 in receipts for expenses in the box. Those expenses are posted to their respective categories and the offset is, of course, Cash. Here is the journal entry:

DESCRIPTION DEBIT CREDITPostage 37.00Office 14.50Meals 36.50Auto 15.00 Cash 92.50

The mistake occurs when you try to do this:

DESCRIPTION DEBIT CREDITPetty Cash 92.50 Cash 92.50

If you went with this second journal entry, you would end up with $192.50 in the Petty Cash account, which is an asset on your balance sheet, and zero in the expense accounts for postage, office, meals, and auto. This doesn’t seem right, does it? If you audited the petty cash box you would not find $192.50 in cash, vouchers and receipts. You would only find $100.00. The Petty Cash amount remains the same as originally established, unless you purposefully decide to increase it. Otherwise, petty cash expenditures must be recorded to their appropriate expense categories.

Go to the articles section of the blog to read my article, “Why Petty Cash” to find out why using a petty cash fund is a good accounting practice.

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Is a manufacturer’s product warranty part of its manufacturing overhead or is it part of its SG&A expense?

The costs associated with a manufacturer’s product warranty are part of its selling expenses and therefore part of its SG&A expenses.

If the future costs of the warranty coverage are probable and can be estimated, they are recorded at the time of the sale. The accounting entry will debit Warranty Expense and will credit Warranty Liability. If the estimated warranty costs are recorded at  the time of the sale, the actual costs of the repair work or the replacement of the product during the warranty period will be debited to the Warranty Liability account—thereby reducing the liability balance.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

What is a fringe benefit rate?

A fringe benefit rate is the cost of an employee’s benefits divided by the wages paid to an employee for the hours working on the job. The following is a sample calculation of the fringe benefit rate for a hypothetical, full-time employee with a wage rate of $20 per hour.

Let’s begin by assuming that a company operates 5 days per week for 8 hours per day for 52 weeks per year—a total of 2,080 hours per year. Let’s also assume that each year the employee is entitled to 15 days of paid vacation, 8 paid holidays, and 5 paid sick days. This amounts to 28 days of 8 hours each, or 224 hours per year that the employee is paid when not on the job. Therefore, the employee’s wages for working on the job will be 1,856 hours per year (2,080 hours minus 224 hours) times $20 per hour = $37,120 for a year.

Next let’s compute the cost of the hypothetical fringe benefits earned by the employee. For the paid vacation, holidays and sick days the annual cost is $4,480 (224 hours not on the job times $20 per hour). Let’s also assume that the employer pays the following annual costs for the employee: $7,200 of the employee’s health, life and disability insurance; $2,000 for the employee’s retirement benefits; $1,100 for worker compensation insurance; $210 for unemployment insurance; and $3,182 (2,080 hours X $20 X 7.65%) for the employer’s portion of the Social Security and Medicare taxes. The sum of these costs for employee benefits is $18,172 per year.

The hypothetical amounts shown above result in a fringe benefit rate of 49%. This is $18,172 of annual benefits divided by the $37,120 of wages earned while working on the job.

Learn more about fringe benefits at Payroll Accounting.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

What are the benefits of a revenue budget?

The main benefit of a revenue budget is that it requires looking into the future. The revenue budget should contain the assumptions made about the future and the details about the number of units to be sold, the expected selling prices, and so on.

The budgeted amount of revenue is then compared to the budgeted amount of expenses in order to determine if the revenues are adequate. Learning of a potential problem before the year begins is a huge benefit because it allows for alternative actions to be developed prior to the start of the new year.

When an annual revenue budget is detailed by month, each month’s actual revenues can be compared to the budgeted amount. Similarly, the actual year-to-date revenues can be compared to the budgeted revenues for the same period. In other words, monthly revenue budgets allow you to monitor revenues as the year progresses instead of being surprised at the end of the year.

Let’s illustrate the benefits of a church’s revenue budget. A church’s annual revenue budget should be prepared independently of the expense budget. The total of the revenue budget is then compared to the annual expense budget. If the annual revenue budget is less than the annual expense budget, action can be taken to develop additional revenues or to reduce the planned expenses before the accounting year begins.

An additional benefit occurs when the annual revenue budget is also detailed by month.  Let’s assume that the church’s monthly revenue budgets will vary by the number of days of worship in the month, the time of year, and other factors. As a result, an annual budget of $370,000 might consist of the following sequence of  monthly amounts: $26,000 + $28,000 + $35,000 + $30,000 + $30,000 + $32,000 + $27,000 + $28,000 + $30,000 + $28,000 + $30,000 + $46,000. Based on these budgeted or planned monthly revenues, the church is expecting to have revenues of $181,000 for the first six months. If the actual revenues for the first six months are only $173,000 the church officials will see that an $8,000 problem at mid-year needs to be addressed. The shortfall also raises the question of whether there will be a similar shortage in the second half of the year. Thanks to the monthly revenue budget, church officials will be alerted early enough to find a solution. The solution could include a message to members asking for additional contributions, an edict to cut expenses for the remainder of the year, and so on.

Preparing a detailed, realistic budget requires you to plan ahead. This in turn gives you insights prior to the start of the accounting year. Monthly revenue budgets allow you to monitor the receipts right from the beginning of the year.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here