Tag Archives | depreciation

Standard Chart of Accounts

See Also:
Chart of Accounts (COA)
Problems in Chart of Accounts Design
Complex Number for SGA Expenses

Standard Chart of Accounts

In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:

The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.

Organize in Numerical System

Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.


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Number of Accounts Needed

Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.

You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.

SAMPLE CHART OF ACCOUNTS

Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.

1000 ASSETS

1010 CASH Operating Account
1020 CASH Debitors
1030 CASH Petty Cash

1200 RECEIVABLES

1210 A/REC Trade
1220 A/REC Trade Notes Receivable
1230 A/REC Installment Receivables
1240 A/REC Retainage Withheld
1290 A/REC Allowance for Uncollectible Accounts

1300 INVENTORIES

1310 INV – Reserved
1320 INV – Work-in-Progress
1330 INV – Finished Goods
1340 INV – Reserved
1350 INV – Unbilled Cost & Fees
1390 INV – Reserve for Obsolescence

1400 PREPAID EXPENSES & OTHER CURRENT ASSETS

1410 PREPAID – Insurance
1420 PREPAID – Real Estate Taxes
1430 PREPAID – Repairs & Maintenance
1440 PREPAID – Rent
1450 PREPAID – Deposits

1500 PROPERTY PLANT & EQUIPMENT

1510 PPE – Buildings
1520 PPE – Machinery & Equipment
1530 PPE – Vehicles
1540 PPE – Computer Equipment
1550 PPE – Furniture & Fixtures
1560 PPE – Leasehold Improvements

1600 ACCUMULATED DEPRECIATION & AMORTIZATION

1610 ACCUM DEPR Buildings
1620 ACCUM DEPR Machinery & Equipment
1630 ACCUM DEPR Vehicles
1640 ACCUM DEPR Computer Equipment
1650 ACCUM DEPR Furniture & Fixtures
1660 ACCUM DEPR Leasehold Improvements

1700 NON – CURRENT RECEIVABLES

1710 NCA – Notes Receivable
1720 NCA – Installment Receivables
1730 NCA – Retainage Withheld

1800 INTERCOMPANY RECEIVABLES

 

1900 OTHER NON-CURRENT ASSETS

1910 Organization Costs
1920 Patents & Licenses
1930 Intangible Assets – Capitalized Software Costs

2000 LIABILITIES

 

2100 PAYABLES

2110 A/P Trade
2120 A/P Accrued Accounts Payable
2130 A/P Retainage Withheld
2150 Current Maturities of Long-Term Debt
2160 Bank Notes Payable
2170 Construction Loans Payable

2200 ACCRUED COMPENSATION & RELATED ITEMS

2210 Accrued – Payroll
2220 Accrued – Commissions
2230 Accrued – FICA
2240 Accrued – Unemployment Taxes
2250 Accrued – Workmen’s Comp
2260 Accrued – Medical Benefits
2270 Accrued – 401 K Company Match
2275 W/H – FICA
2280 W/H – Medical Benefits
2285 W/H – 401 K Employee Contribution

2300 OTHER ACCRUED EXPENSES

2310 Accrued – Rent
2320 Accrued – Interest
2330 Accrued – Property Taxes
2340 Accrued – Warranty Expense

2500 ACCRUED TAXES

2510 Accrued – Federal Income Taxes
2520 Accrued – State Income Taxes
2530 Accrued – Franchise Taxes
2540 Deferred – FIT Current
2550 Deferred – State Income Taxes

2600 DEFERRED TAXES

2610 D/T – FIT – NON CURRENT
2620 D/T – SIT – NON CURRENT

2700 LONG-TERM DEBT

2710 LTD – Notes Payable
2720 LTD – Mortgages Payable
2730 LTD – Installment Notes Payable

2800 INTERCOMPANY PAYABLES

2900 OTHER NON CURRENT LIABILITIES

3000 OWNERS EQUITIES

3100 Common Stock
3200 Preferred Stock
3300 Paid in Capital
3400 Partners Capital
3500 Member Contributions
3900 Retained Earnings

4000 REVENUE

4010 REVENUE – PRODUCT 1
4020 REVENUE – PRODUCT 2
4030 REVENUE – PRODUCT 3
4040 REVENUE – PRODUCT 4
4600 Interest Income
4700 Other Income
4800 Finance Charge Income
4900 Sales Returns and Allowances
4950 Sales Discounts

5000 COST OF GOODS SOLD

5010 COGS – PRODUCT 1
5020 COGS – PRODUCT 2
5030 COGS – PRODUCT 3
5040 COGS – PRODUCT 4
5700 Freight
5800 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Reserved

6000 – 7000 OPERATING EXPENSES

6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expense
6150 Bad Debt Expense
6200 Bank Charges
6250 Cash Over and Short
6300 Commission Expense
6350 Depreciation Expense
6400 Employee Benefit Program
6550 Freight Expense
6600 Gifts Expense
6650 Insurance – General
6700 Interest Expense
6750 Professional Fees
6800 License Expense
6850 Maintenance Expense
6900 Meals and Entertainment
6950 Office Expense
7000 Payroll Taxes
7050 Printing
7150 Postage
7200 Rent
7250 Repairs Expense
7300 Salaries Expense
7350 Supplies Expense
7400 Taxes – FIT Expense
7500 Utilities Expense
7900 Gain/Loss on Sale of Assets

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standard chart of accounts

Originally posted by Jim Wilkinson on July 24, 2013. 

52

What is GAAP?

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules and guidelines for U.S. companies to follow. GAAP regulates financial reporting for public companies, private businesses, non-profits, and government authorities. This means that GAAP outlines the procedures to make sure that businesses are recording their financials in the same way.

GAAP Principles

The principles in GAAP ensure transparency and consistency. This includes the following topics:

The overall philosophy behind these principles is to prevent deceptive recording.

What is IRFS?

While the United States follows the GAAP, most of the developed world follows the International Financial Reporting Standards (IFRS.) In 2008, the United States decided to move towards adopting the IFRS to be more consistent with the rest of the world. While the long term effects are only speculative, the short term changes will have an immediate impact on accountants, managers, and investors.

IFRS vs GAAP

What is the benefit of following the same set of guidelines as the rest of the world? One major advantage of having the same international financial reporting guidelines is the effect on investors. Investors will be able to compare and contrast investments between nations more accurately.

For example, if there is one startup in the United States and one in London, then they will likely use different methods for financial reporting. This could make the investor’s decision very difficult. If inventory and depreciation are valued differently, then the investor might not fully understand the true standing of these startups.

What is GAAP

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Tax Abatement

Tax Abatement Definition

Tax abatement, defined as the decreasing of the tax responsibility of a firm by government, is one of the tools which government uses to motivate behavior in a firm. A tax abatement credit is generally given to a firm when the government wants the saved money to be spent in another way: to increase savings or spending rate, invest in equipment, or others.

Tax Abatement Meaning

Tax abatement means a tax incentive given to business‘ for the purpose of spending it in another way. These motivations are common to in the business world; tax breaks for research and development, depreciation, and more. These perks allow a business to focus on the future rather than trying to survive in the present.

From a governmental standpoint, a tax abatement program is a tool to motivate business to operate a certain way. Similar to the savings and loan crisis of the 1980’s, where government increased regulations, tax abatements have the opposite effect. Rather than preventing certain behavior, a tax abatement agreement can make other behaviors easier and more appealing. This type of approach is favored by many economists.

Tax Abatement Example

Claus is the owner of a technology company. Creating microprocessors, Claus has many expenses to cover along the path of creating a better product. Claus must constantly be thinking forward to what the market will do.

Claus’ company experiences many tax abatements. First, he has a depreciation schedule for many of his capital expenses. Thanks to the tax abatement forms he completes, he can recover the expense of these items rather than having to pay for them. Claus’ company also receives tax abatement for research and development. Here, his company can recover the expenses of r&d. Due to the fact that r&d takes quite a while to create return on investment, Claus can use the cash he saves rather than having it tied up into finding a better way to do business.

Claus is very thankful for the tax abatement he receives. It makes his life, as well as his business operations, much easier. When Claus goes home he must fill out yet another tax abatement letter; the IRS discount for having a family with children.

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See Also:
Direct Tax
Tax Brackets
Ad Valorem Tax
Tax Efficiency
Federal Unemployment Tax Act (FUTA)

1

Scrap Value

Scrap Value Definition

Scrap value, defined also as salvage value, is the value of an asset after it is fully depreciated. Once an asset reaches the point where it is fully depreciated, has lost the vast majority of production efficiency due to use, and is ready to be resold, it has reached the scrap value. At this point, managers must make the decision of whether to sell the asset for it’s material, or recyclable value, continue using it despite the fact that it is no longer in good operating condition, or trash the asset.

Scrap Value Explanation

Scrap value, explained as the value an asset has on the open market after it has surpassed it’s useful lifetime, is very important in the eyes of accountants and CFO’s. Because financial planners in a company deal closely with assets and their depreciation schedules, they are the main monitoring body which decides when a piece of equipment has reached it’s scrap value in accounting. These financial managers, working with GAAP and any government requirements placed upon them, decide the amount of use an item can take before it becomes useless. With this they decide how much of this use happens per year, known as depreciation, and when a piece of equipment can no longer be used.

Final Scrap Value

Once an item reaches it’s final scrap value, accounting professionals see several available options. First, the item can be sold to another company which can still make use of the asset, despite the less-than-optimal condition it is in. This depends on the chosen depreciation schedule and whether the item can still operate, in some ways, as designed.

Second, the item can be sold for it’s value in raw materials. For example, a large printing press can be sold for it’s metal content to a recycling facility after it is no longer able to be used for printing purposes. Though this item will be sold for a relatively small amount of money it will still create some value for the company.

Third, the item can be trashed if it has no real scrap value. In this scenario, the item has such little value that it creates more cost in resale than it does when thrown away. An example of this would be an old computer: the man hours spent to resell the computer often outweigh the income gained from selling it.

Only material assets have a scrap value. To simplify, if an asset does not depreciate it does not have a scrap value. For example, this scrap value wiki will never depreciate and thus has no scrap value in accounting.

Scrap Value Calculation

There is no simple method for scrap value calculation. More, scrap value is a result of market factors. On one hand, one must figure out the market value for an almost useless asset. This will provide the scrap value if it is sold for use.

On the other hand, one must also figure out the total value of the raw materials contained in the asset. This will lead to the value of the asset if it is recycled.

Whichever of these values is greater will become the scrap value for the asset. The reasoning behind this is simple: company controllers will, obviously, choose to sell the item for more rather than less money.

Scrap Value Example

For example, Leo is the head accountant at a company which prints marketing messages on common items: hats, cups, silverware, and other items designed to attract attention for a business when they are used. Leo likes his work because it allows him to bring value to his company through the decisions and analysis he performs.

Then, Leo, performing his monthly tasks, notices that one of the company assets is nearing the end of it’s depreciation schedule. Once it reaches the end of this schedule it will be at scrap value. Leo, the ever-active analyst, must make the decision of how to gain maximum value from the scrapped piece of equipment.

Leo notices that he recorded a market value for the scrapped piece of equipment in recycling. He notes this value as he moves forward with his work. Leo explores other options before he makes a decision.

Leo does a bit of networking and finds a potential buyer for the scrapped printer which is nearing the end of it’s lifetime. This buyer, knowing that the item will not be able to perform some of the functions it was originally designed for, is willing to offer $5,000.

Next, Leo talks with a decision maker at a local scrap metal company. The item is found to have $2,500 in value for the metal it is made of. The scrap metal company, however, can not pick up the item. It will have to be shipped to their headquarters. This salvage value is less than Leo initially found. He attributes this difference to changes in the market value for metals.

Calculate Total Cost

Leo calculates the total cost for his company to sell the item. What he finds is shocking. The company will gain more monetary value from trashing the item than it will selling it. The math is simple: disassembling and shipping the item to his buyer will cost $5,015. Though his company only saves $15, Leo knows that “a penny saved is a penny earned”.

Conversely, to disassemble and ship the large printer to the scrap metal company will be slightly less than this. This, combined with the negotiating time spent at the scrap metal company will result in a loss of $5. Once again, Leo will make the prudent financial decision even if it is a small one.

Leo completes his decision. He is happy that he did the proper research. His work results in a greater company value than if he had not. Leo loves his work for this very reason: he can make a difference in the lives of the company employees and shareholders.

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See Also:
Adjusted Present Value (APV)
Asset Market Value vs Asset Book Value
Future Value
Going Concern Value
Customer Analysis

0

Replacement Costs

Replacement Costs Definition

In accounting, the replacement costs of an asset is the current market price a company would have to pay to replace an existing asset. This is in contrast to book value. Book value is the historic purchase price of the asset, less accumulated depreciation.

Replacement Costs Example

For example, if a company bought a machine for $1,000 five years ago, and the value of the asset today, less depreciation, is $300 dollars, then the book value of the asset is $300. However, the cost to replace that machine at current market prices may be $1,500. Therefore, the replacement cost would be significantly higher than the book value.

Similarly, if the company bought a quantity of steel for $10,000 a year ago, and the price of steel subsequently sky-rocketed, then the replacement cost for that same amount of steel could be $15,000, or whatever the current market price of steel dictates for the given quantity.

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Replacement Costs
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Replacement Costs

See Also:
Sunk Costs
Asset Market Value vs Asset Book Value
Accelerated Method of Depreciation
Straight Line Depreciation
Double Declining Method of Depreciation

0

Modified Accelerated Cost Recovery System (MACRS)

See Also:
Straight Line Depreciation
Double Declining Depreciation Method
Accelerated Method of Depreciation
Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles

Modified Accelerated Cost Recovery System Definition

The modified accelerated cost recovery system (MACRS) method of depreciation assigns specific types of assets to categories with distinct accelerated depreciation schedules. Furthermore, MACRS is required by the IRS for tax reporting but is not approved by GAAP for external reporting.

MACRS Depreciation Calculation

To calculate depreciation for an asset using MACRS, first determine the asset’s classification. Then use the table (below) to find the appropriate depreciation schedule.

When using MACRS, an asset does not have any salvage value. This is because the asset is always depreciated down to zero as the sum of the depreciation rates for each category always adds up to 100%. When calculating depreciation expense for MACRS, always use the original purchase price of the asset as the depreciable base for each period. Note that you depreciate each category for one year longer than its classification period. For example, depreciate an asset classified under 3-Year MACRS for 4 years. Then depreciate an asset classified under 5-Year MACRS for 6 years, and so on.

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MACRS Example

For example, an asset purchased for $100,000 that falls into the 3-Year MACRS category shown below, would be depreciated as follows:

YearDepreciation Rate     Depreciation Expense
  1     33.33%         $33,330     (33.33% x $100,000)
  2     44.45%         $44,450     (44.45% x $100,000)
  3     14.81%         $14,810     (14.81% x $100,000)
  4      7.41%          $7,410     (7.41%   x $100,000)

MACRS Depreciation Table

Below is the table for Half-Year Convention MACRS for 3, 5, 7, 10, 15, and 20 year depreciation schedules.

Depreciation Rates (%)

Year    3-Year    5-Year   7-Year   10-Year  15-Year  20-Year 

  1     33.33     20       14.29    10       5        3.75
  2     44.45     32       24.49    18       9.5      7.219
  3     14.81     19.2     17.49    14.4     8.55     6.677
  4      7.41     11.52    12.49    11.52    7.7      6.177
  5               11.52     8.93     9.22    6.93     5.713
  6                5.76     8.92     7.37    6.23     5.285
  7                         8.93     6.55    5.9      4.888
  8                         4.46     6.55    5.9      4.522
  9                                  6.56    5.91     4.462
 10                                  6.55    5.9      4.461
 11                                  3.28    5.91     4.462
 12                                          5.9      4.461
 13                                          5.91     4.462
 14                                          5.9      4.461
 15                                          5.91     4.462
 16                                          2.95     4.461
 17                                                   4.462
 18                                                   4.461
 19                                                   4.462
 20                                                   4.461
 21                                                   2.231

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Modified Accelerated Cost Recovery System

MACRS and the IRS

For more detailed information regarding MACRS, go to: irs.gov/publications

3

Free Cash Flow Analysis

Free Cash Flow Analysis Definition

Free cash flow analysis is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period.

Calculation of Free Cash Flow

Free cash flow = Net cash flow from operating activities – capital expendituresdividends

Or

= Net income + amortization + depreciation + deferred taxes – capital expenditures – dividends


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Applications

Free cash flow is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

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See Also:
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Cycle
Steps to Track Money In and Out of a Company

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