the effect of business transactions on the basic accounting equation.

Running Head : ACCOUNTING EQUATION

The Effect of Business Transactions on the Basic Accounting Equation

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The Effect of Business Transactions on the Basic Accounting Equation

Problem 1

Amortization is the paying off a debt in regular installments over a period of time . It may also refer to expensing the acquisition cost less the residual value of certain intangible assets in a systematic manner applied by a company over the useful life of the asset . This is to reflect

the consumption or decline in value of the intangibles as a result of the passage of time . However , some intangibles like goodwill may not be subject to amortization because they are sometimes deemed to have an indefinite useful life

An example would be : Ayala Company issued a note worth 100 , 000 as additional capital payable in 1 year at the rate of 10 per annum Monthly amortization , which will constitute the interest payment , will be 833 .33 computed as [ 100 ,000 (10 / 12 months]

Depreciation , on the other hand , is a non-cash expense recorded to allocate a tangible assets cost over its estimated useful life . This is recorded to match the expenses of the asset to the revenue that the asset helps the company earn (cited in Valix , 2006 . Depreciation is made because the worth of the assets (except land ) are constantly reduced or loses its value over time . Because it is has a non-cash nature , it increases free cash flow and reduced net income

For instance , Ayala Company purchases a delivery truck for 25 ,000 with a salvage value of 5000 and an estimated useful life of 10 years Using the straight-line method , depreciation for the delivery truck would be 2000 annually computed as [ 25000- 5000 / 10 years] . This 2000 will serve as the depreciation expense for the year , and at the same time added per year to the accumulated depreciation of the delivery truck , which is a contra-asset account or which reduces the value of the asset

Amortization and deprecation are two distinct concepts in accounting which are often used interchangeably . This is technically incorrect because amortization refers to intangible assets and depreciation refers to tangible assets ( Amortization

Problem 2 The manufacturer 's sale of furniture to Simon and Hobbs for 10 ,000 was made late in year 2000 . However , the receipt of the goods will still be on January 2001 . The store is ineligible for the sale of the furniture to the Simon family since the transaction is considered invalid . This is primarily because the furniture was not yet actually received thereby there was nothing yet to sell . Moreover , even if the terms of the purchase from the manufacturer was either FOB Shipping Point or Destination , ownership is not yet entitled to Simon and Hobbs , making the sale to the Simon family ineffectual

Simon also instructs the accountant not to record year-end adjustments for the store namely the salaries owed to the employees worth 9 ,000 and...