[Q.41] What type of expense is the purchase of propane?

Technically, the purchase of propane is not an expense. Depending on the business, the propane is an asset until it is used, resold, or included in a product that is sold. At that time it will become an expense.

If the purchased propane is used relatively soon, accountants will usually skip recording the asset. Here are three examples of how the expense might be reported on the company’s income statement.

Example 1. A service company purchases $900 of propane to heat its office for the following month. Technically the propane is an asset until used. However, the accountant is likely to skip recording of the asset and will record the purchase as a $900 operating expense.

Example 2. A local dealer purchases large quantities of propane and then delivers the propane in small quantities to its customers. The dealer will record the purchase as the asset Propane Inventory. As the propane is sold, the dealer will reduce Propane Inventory for the cost of the propane sold and will increase the expense Cost of Goods Sold.

Example 3. A manufacturer uses propane in its factory operations. The cost of the propane purchased is likely to be recorded as Manufacturing Overhead. Manufacturing Overhead is allocated to the products manufactured and will be part of the products’ cost. If the products are in Inventory, those products’ costs are assets. If the products are sold, those products’ costs will be expensed as Cost of Goods Sold.

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[Q.42] What is the proper use of the words lend and borrow?

If a company is granted a loan from its bank, the company is borrowing money from its bank, and thebank is lending money to one of its customers. In other words, the bank is the lender and the loan customer is the borrower.

To use your friend’s car, you might ask “May I borrow you car? or “Will you lend me your car?” If your friend agrees, you are borrowing your friend’s car and your friend is lending his or her car.

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[Q.43] What is a reclassification?

In accounting, the word reclassification is often used to describe moving an amount from one general ledger account to another. For example, if an expense was charged to marketing supplies instead of administrative supplies, the correcting entry might read: To reclassify from marketing supplies to administrative supplies.

Reclassification can also refer to other situations. For example, when a company’s long-term note payable becomes due in less than one year, the note will be reclassified to the current liabilities section of the balance sheet. If a company stops using one of its buildings and puts the building up for sale, the building will be reclassified from Property, Plant and Equipment to the Investments section of the balance sheet.

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[Q.44] What is the difference between public companies and public sector?

Public companies are those businesses owned by individuals (and not by a government). If a public company is a corporation whose stock is traded on a stock exchange it is said that the stock is publicly traded or that the company is a publicly-traded corporation.

Public sector refers to government-owned organizations and government-provided services.

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[Q.45] What is the difference between public sector and private sector?

Public sector refers to government-owned organizations and government-provided services.

Private sector refers to 1) organizations that are not government owned, and 2) the goods and services provided by organizations outside of the government. For example, companies owned by individuals are part of the private sector. Even the largest corporation with its common stock publicly-traded on the New York Stock Exchange is part of the private sector.

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[Q.46] How is a short term bank loan recorded?

Let’s assume that a company obtains a 9-month bank loan and the bank deposits the loan proceeds into the company’s checking account at the same bank.

The double entry to be recorded by the company is: 1) a debit to the company’s current asset accountCash (or Checking Account) for the amount that the bank deposited into the company’s checking account, and 2) a credit to the company’s current liability account Notes Payable (or Loans Payable) for the amount of principal that it must repay to the bank. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)

The double entry to be recorded by the bank is: 1) a debit to the bank’s current asset account Loans (orLoans Receivable) for the principal amount it will collect, and 2) a credit to the bank’s current liability account Noninterest Bearing Demand Deposits. (If there is a difference between the two amounts, it may pertain to bank fees or prepaid interest that will also have to be recorded.)

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[Q.47] Where in the chart of accounts is a suspense account located?

A suspense account could be located in any part of an organization’s chart of accounts. In other words, a suspense account could be located in any of these sections: asset, liability, revenue, expense.

Let’s illustrate why any or all four of these sections of the chart of accounts might contain a suspense account. Assume that a company receives cash of $500 but is not able to determine the reason for the receipt. Because of double-entry accounting or bookkeeping, the company’s asset account Cash is debited for $500 and there needs to be at least one other account credited and the total of the credits must be $500. Without knowing exactly the nature of the $500 receipt, the best location of a suspense account could be any of the following:

1. The unknown credit might involve an asset account if the cash was from the sale of another asset or the collection of an asset. In this example, the best suspense account location would be in the asset section.

2. The unknown credit could involve a liability account if the cash was a deposit for future work to be done. Given these facts, the best suspense account location is the liability section.

3. The unknown credit might involve a revenue account if the cash was received for work that was recently earned, but not yet billed. In this situation the best suspense account location would be the revenue section.

4. The unknown credit might involve an expense account if the cash was received as a refund of an earlier expense. In this case the best suspense account location is the expense section of the chart of accounts.

Unfortunately the best location is not known at the time of the receipt, and it is hard to say where you will find the suspense account in your own general ledger.

Be aware that if the unknown account is a revenue or expense account and the amount is reported in a suspense account in your current liability section of the balance sheet, your company’s net income is incorrect and all of the financial statements are incorrect. If the amount is insignificant, the problem is very small. If the amount is significant, you should find out the proper account before issuing the financial statements.

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[Q.48] What is capital budgeting?

Capital budgeting is a process used by companies for evaluating and ranking potential expenditures or investments that are significant in amount. The large expenditures could include the purchase of new equipment, rebuilding existing equipment, purchasing delivery vehicles, constructing additions to buildings, etc. The large amounts spent for these types of projects are known as capital expenditures.

Capital budgeting usually involves the calculation of each project’s future accounting profit by period, the cash flow by period, the present value of the cash flows after considering the time value of money, the number of years it takes for a project’s cash flow to pay back the initial cash investment, an assessment of risk, and other factors.

Capital budgeting is a tool for maximizing a company’s future profits since most companies are able to manage only a limited number of large projects at any one time.

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[Q.49] What is a bond sinking fund?

A bond sinking fund is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable. The bond sinking fund begins when the corporation deposits money with an independent trustee. The trustee then invests the money in order for the balance in the sinking fund to increase. The balance in the sinking fund will also grow from additional required deposits made by the corporation. The bond sinking fund decreases when the trustee purchases or redeems the corporation’s bonds.

Not all corporations with bonds payable are required to have a bond sinking fund. However, bonds with sinking funds are likely to be viewed as less risky.

A bond sinking fund is reported on the bond issuer’s balance sheet under the caption Investments, the first long-term (or noncurrent) asset section appearing immediately after current assets.

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[Q.50] What is the three-way match?

In accounting, the three-way match refers to a procedure used when processing an invoice received from a vendor or supplier. The purpose of the three-way match is to avoid paying incorrect and perhaps fraudulent invoices.

Three-way refers to the three documents involved:

1. Vendor’s invoice which was received and will become part of an organization’s accounts payable if approved.

2. Purchase order that was prepared by the organization.

3. Receiving report that was prepared by the organization.

Match refers to the comparison of the quantities, price per unit, terms, etc. appearing on the vendor’s invoice to the information on the purchase order and to the quantities actually received.

After the vendor’s invoice has been validated by the three-way match, it can be further processed for payment.

The three-way match is an important step in safeguarding an organization’s assets.

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[Q.31] What is a cost center?

A cost center is often a department within a company. The manager and employees of a cost center are responsible for its costs but are not responsible for revenues or investment decisions.

A manufacturer’s cost centers include each of its production departments as well as the manufacturing service departments such as the maintenance department or quality control department. Other examples of cost centers include the human resource department, the IT department, the accounting department, and so on.

Cost centers are not limited to departments. There might be several cost centers within a department. For example, each assembly line could be a cost center. Even a special machine could be a cost center.

Cost centers are usually associated with the topic of decentralization, responsibility accounting, and planning and control.

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[Q.32] Isn’t all overhead fixed?

Not all overhead is fixed. Some manufacturing overhead costs, which are also referred to as indirect factory costs, are variable.

A common example of a variable overhead cost is the electricity used to operate factory equipment. The electricity is an indirect manufacturing cost (since it is not part of the direct materials or direct labor) and the total cost of the electricity used in the factory will increase when the equipment is used to create more products. There will also be less total electricity cost when the equipment produces fewer units of output.

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[Q.33] What are inventoriable costs?

Inventoriable costs are 1) the costs to purchase or manufacture products which will be resold, plus 2) the costs to get those products in place and ready for sale. Inventoriable costs are also known asproduct costs.

To illustrate, let’s assume that a retailer purchases an item for resale by paying $20 to the supplier. The item is purchased FOB shipping point, which means that the retailer must pay the freight from the supplier to its location. If that freight cost is $1, then the retailer’s inventoriable cost is $21. Assuming this is the only item in the retailer’s inventory, the retailer’s balance sheet will report inventory at a cost of $21. When the item is sold, the retailer’s inventory will decrease by $21 and the $21 will be reported on the income statement as the cost of goods sold.

In the case of a manufacturer, a product’s inventoriable costs are the costs of the direct materials, direct labor and manufacturing overhead incurred in manufacturing the product.

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[Q.34] What is accrued rent?

Accrued rent could be the rent that a landlord has earned but has not been received from the tenant. Under the accrual method of accounting this would be reported by the landlord on the income statement as Rent Revenue or Accrued Rent Revenue and on the balance sheet as the asset Rent Receivable.

Accrued rent could also refer to the rent expense that the tenant has incurred but has not yet paid the landlord. Under the accrual method of accounting the tenant would report the accrued rent as Rent Expense on its income statement and on its balance sheet as the liability Accrued Expenses or Rent Payable.

If the rent is to be paid at the beginning of each month, there would be accrued rent only if the tenant fails to pay the rent when it was due.

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[Q.35] What are term bonds and serial bonds?

Term bonds are bonds which mature or come due on a single date.

Serial bonds are bonds which do no not mature or come due on a single date. Instead, serial bonds have maturity dates which are staggered over several or many years. You could say that serial bonds come due over a series of dates.

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