ACCOUNTING II: REVENUES AND EXPENSES

ACCOUNTING FOR ASSETS

Inventory

Cost accounting is the process of determining how much a

unit of inventory costs. Direct Costs
Cost of Goods Sold (COGS) is the expense account material costs
labor costs
associated with the sale of inventory.
Specific identification is the method of accounting for Conversions Costs
the cost of inventory by expensing inventory sales as they labor costs
occur. overhead costs
First-in, first-out (FIFO) is the method of accounting for
Indirect Costs
the cost of inventory by expensing the cost of the oldest overhead costs
inventory first.
Last-in, first-out (LIFO) is the method of accounting for
the cost of inventory by expensing the cost of the newest
inventory first.
Conversion costs include direct labor and overhead costs
for producing a good or service.
Production overhead is an indirect cost that includes all
general costs of the production process, minus direct costs
(direct labor and raw materials) and SG&A activities.
The overhead rate distributes the overhead costs to
inventory based on metrics such as labor costs, labor hours,
etc.

Depreciation Accelerated depreciation:

A method of assigning more
depreciation expense in
Fixed assets are tangible noncurrent assets. the beginning of the asset’s
service life and less at its end.
Service life is the expected amount of time (often estimated
by a tax authority) a fixed asset will remain useful before Accumulated depreciation:
succumbing to wear-and-tear or obsolescence. The total depreciation a
Depreciation is the means by which the cost of a fixed asset fixed asset has undergone
is expensed over time. to date; also the contra-asset
account recording the total
Depreciation expense is the amount of depreciation depreciation of all assets.
assigned to an asset each accounting period.
Year Depreciation Accumulated Book
Straight-line depreciation is a method of depreciating an Expense Depreciation Value
asset in equal amounts each accounting period of the asset’s
1 12,000 12,000 28,000
service life.
2 10,000 22,000 18,000
Units of production is a method of assigning depreciation 3 8,000 30,000 10,000
4 6,000 36,000 4,000
based on the output of an asset.
5 4,000 40,000 0

©2021 QUANTIC SCHOOL OF BUSINESS AND TECHNOLOGY

ACCOUNTING II: REVENUES AND EXPENSES

The difference between an asset’s cost and its accumulated

depreciation is its book value.
The difference between the sale value of an asset and its
book value is recorded in the equity account, Gain (Loss) on
Asset Disposal.

Depletion and Amortization

Wasting assets are natural resources, such as wells and

mines, that undergo depletion.
Depletion occurs as wasting assets are used up.
Similar to an asset’s depreciable cost, the depletion base
is the total value of a wasting asset that will undergo
depletion.
Depletion rate equals the depletion base divided by the
total number of units of substance that will be extracted
from a resource.
Amortization is the process by which intangible assets
are expensed over time in accordance with the matching
concept.

©2021 QUANTIC SCHOOL OF BUSINESS AND TECHNOLOGY