SMARTLY

ACCOUNTING II: REVENUES AND EXPENSES

ACCOUNTING FOR ASSETS

Inventory
Cost accounting is the process of determining how much a unit of Direct Costs
inventory costs.
material costs
Cost of Goods Sold (COGS) is the expense account associated
with the sale of inventory. labor costs
overhead costs
Specific identification is the method of accounting for the cost
of inventory by expensing inventory sales as they occur.
Conversions Costs
First-in, first-out (FIFO) is the method of accounting for the cost material costs
of inventory by expensing the cost of the oldest inventory first.
labor costs
Last-in, first-out (LIFO) is the method of accounting for the cost
of inventory by expensing the cost of the newest inventory first. overhead costs

Conversion costs include direct labor and overhead costs for Indirect Costs
producing a good or service.
material costs
Production overhead is an indirect cost that includes all general labor costs
costs of the production process, minus direct costs (direct labor
and raw materials) and SG&A activities. overhead costs
The overhead rate distributes the overhead costs to inventory
based on metrics such as labor costs, labor hours, etc.

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

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.