Is the drawing account a capital account?

Yes, an owner’s drawing account is a capital account. However, the drawing account is expected to have a debit balance, whereas the owner’s main capital account is expected to have a credit balance.

The drawing account will have a debit balance for two reasons. First the draw or withdrawal by the owner reduces the capital account. Second, because each transaction involves a debit and a credit, and because a withdrawal of cash requires a credit to the Cash account, the owner’s drawing account will need a debit for the same amount.

At the end of the accounting year, the debit balance in the drawing account is closed by transferring the debit balance to the owner’s capital account.

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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Why do bonds rarely sell for their maturity value?

The reasons why bonds rarely sell for their maturity value are:

1. The interest paid is usually fixed at the interest rate that is stated on the face of the bond. As a result, the amount of interest paid each year does not change during the life of the bond.

2. The market interest rate—the rate that bond buyers demand—is changing daily.

To illustrate, let’s assume that a 6% bond will mature in ten years and has a maturity value of $100,000. This means that the bondholders will be receiving $6,000 in interest in each of the ten years. If there is a day when the bond buyers demand an interest rate of 6.2% then the bond’s value on that day will be less than $100,000. If on another day the bond buyers demand 5.9% interest, the bond’s value on that day will be greater than $100,000.

Learn more about Bonds Payable.

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

How does the aging of accounts receivable determine bad debts expense?

The aging of accounts receivable allows you to quickly identify the credit customers that are past due and the length of time that the amounts have been past due. Focusing on the past due accounts receivable will assist you in estimating how much of the accounts receivable will never be collected.

The estimated amount of accounts receivable that will never be collected should be the credit balance in the general ledger account Allowance for Doubtful Accounts. This credit balance when combined with the debit balance in Accounts Receivable will mean that the amount that is likely to be collected will be reported on the balance sheet.

When the Allowance for Doubtful Accounts is credited to increase its balance, the entry will debit the general ledger account Bad Debts Expense.

Learn more about Accounts Receivable and Bad Debts Expense.

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 Working with the Equity section of your Balance Sheet by naveen14

As I say in my newly posted article, “Equity Accounts – It’s Your Money“, the equity section of the balance sheet is the least understood. I give examples of the general ledger accounts that are found in the equity section for a sole proprietor, partnership, and corporation along with an explanation of how the accounts function.

The key to understanding these accounts is having a working knowledge of how debits and credits are recorded depending on whether a transaction calls for an increase or a decrease. Use the Accounting Model link in the article if you need brusing up.

For example, if you are a sole proprietor and you take money out of your business for personal purposes then you would record an entry on the debit side of the general ledger account “Owner’s Draw”. Increases to Equity require a credit entry, while decreases to Equity require a debit entry.

In the example, if you wrote yourself a check you would be decreasing Cash, which is an asset. Since you wrote the check to yourself, it makes sense that you decreased your Equity. Here is the tricky part and why you need to “think out” what you are doing using the Accounting Model:

You decreased your Equity by making a debit entry to Owner’s Draw and you decreased cash in your bank account when you withdrew money for personal reasons and made a credit entry to CASH. Seems straightforward doesn’t it?

But you increased the Owner’s Draw account while at the same time decreasing your equity. Sometimes this concept is hard for people to grasp. You just have to remember that Owner’s Draw is a general ledger account found within the Equity Section.

It is useful to remember the fundamental accounting equation:

ASSETS = LIABILITIES + EQUITY

When Cash, an asset, was decreased then either Liabilities or Equity would also have to be decreased in order to stay in balance. In this case, the decrease was in Equity.

The rule is that in any transaction recorded the DEBIT SIDE MUST EQUAL THE CREDIT SIDE of the ledger.

Any questions?

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Comment on Detail of the General Ledger Report by John

How in the world could anyone working in accounting get along without a Detail of the General Ledger report? That would be like working with your hands tied and your eyes blindfolded. Without this report you would have a very difficult time determining how a final balance in a particular account was derived. Here is why:

Picture this: Back in the not-to-distant past (before computers really caught on) we accountants recorded each transaction of the business manually into a great big hard-bound, three-leaf binder book with yellow pre-printed ledger pages. Obviously, this was a very time-consuming, tedious process. Each page not only recorded the numbers associated with the transaction, it also recorded where the numbers came from, the date, and, when appropriate, a very brief note to the side describing additional detail. Here is an example of a general ledger account page:

Account 1010 – Cash-in-Bank

Transactions may come from a variety of journals, but they all pyramid into the General Ledger. I use the word “pyramid” because it is helpful to visualize the shape of a pyramid with all the source documents spread out at the base. The information is being summarized from each document and “migrates” upward to the General Ledger and eventually to the financial statements, which are at the top of the pyramid:

Fin State
Trial Balance
General Ledger
Gen Jour, Cash Rec, Cash Disb, Acct Rec, Acct Pay
Sales Invoices, Purchase Invoices, Bank Rec, Check Register

If I wanted to find out how a particular balance came to be, all I had to do was look at the detail on the general ledger page. That detail would then tell me which source documents contained the numbers that contributed to the final balance. I did not have search all over kingdom come to find what I was looking for.

Nowadays, your computer accounting software should give you a report of the detail in your General Ledger that is laid out as cleanly and clearly as presented above. Just like you would find in a manual general ledger. The report should not be encumbered with all kinds of other information that makes it hard to decipher. Some software programs don’t call this report a Detail of the General Ledger, they call it a transaction report or something similar.

Furthermore, you should be able to print a report for any period your heart desires, for instance: a year-to-date report; from February to July; for just one month; or whatever. You need that flexibility. If you need to see all twelve months of activity for a particular account, then you need to see all twelve months. You should not have to print out each month separately and then manually piece them together. And, if you only need to look at one month, you don’t want to have to print out the entire year.

A good report will enable you to use it as an analytic tool to find mistakes. Let’s assume that after printing your financial statements you looked at the Cash-in-Bank account and it said the balance was $3,556.38. Being the good accountant that you are, you verified that balance with the bank reconciliation balance and found that it said the balance should be $3,583.38. The difference between the two totals is $27.00. Your first step should be to run a Detail of the General Ledger report for the month, which you do and it is our example above. The first thing you notice is a $27.00 credit entry. This is suspicious and worth investigating. You can see that this entry came from the General Journal so you turn to page 4. Let’s hypothesize and assume that you really meant for this credit entry to go to Employee Advance, which is 1110. You simply wrote the wrong GL Account number.

We used to call this procedure “smoking out the error”. Sometimes the errors are easy to find, sometimes not so easy. The process consists of verifying the final balances that are on the financial statements. What is in the General Ledger should be what is on the financial statements. Therefore, you must use another document as a means of verifying the account balance. In our example above, we used the Bank Reconciliation. Other documents used to verify balances could be the Accounts Payable Ledger, Accounts Receivable Ledger, Sales Tax Report, Payroll History Report, Inventory Control Report, Notes Payable Amortization Schedule, and so on.

Just like a carpenter who uses a level before nailing up a board, you will want to verify your balances with these other control reports before accepting the financial statements as being correct. If the board isn’t level, the carpenter must figure out why. If an account balance is different than the balance found on the control document, then use your analytical tool called the Detail of the General Ledger Report to discover why.

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Can a cost be both a direct cost and an indirect cost?

A cost can be both a direct cost and an indirect cost. One of many examples is the cost of a supervisor in a department within a factory.

Let’s assume that Sam earns $50,000 per year as the supervisor of the machining department of a factory. Sam’s $50,000 is a direct cost of the machining department because Sam works only in the machining department. Hence, this $50,000 is directly traceable to the machining department.

Sam’s $50,000 is also an indirect product cost. It is an indirect cost because the supervisor of the machining department is part of the factory overhead costs that must be assigned to the products. (Instead of being assigned we could say that manufacturing overhead must be allocated or applied to products by using an overhead rate.) We might also say that Sam’s $50,000 is part of the factory overhead costs that must be absorbed by the products by means of a factory overhead rate.

Learn more about Manufacturing Overhead.

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

Where can I get official information for federal payroll taxes?

For official information on federal payroll taxes we recommend the Internal Revenue Service Publication 15 which is known by two names: Circular E and Employer’s Tax Guide. This free publication is available at the website IRS.gov.

The Employer’s Tax Guide is updated each year by the IRS and contains approximately 70 pages of information on payroll. The information includes required withholdings, employer’s payroll taxes, required reporting, federal income tax withholding tables, and more.

Learn more about 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