Domain 2 Lesson 2

29 | Domain 2 Lesson 2: Adjust Inventory Balances Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Fill-in-the-Blanks
Instructions: While watching Domain 2 Lesson 2, fill in the missing words according to the information presented by the
instructor. [References are found in the brackets.]

1. depreciates the asset at an equal amount over its useful life. [Service Life
and Depreciation]

2. To record depreciation, an accountant would make a to increase depreciation expenses

and the associated asset account to decrease a long-term asset’s value. [Depreciation Expense on
Income Statements]

3. Assets must always liabilities owner’s equity. [Sales Transaction Effects]

4. Merchandise inventory is an asset, so a cash purchase does not affect the balance of the accounting equation, but
a credit purchase raises both while owner’s equity stays the same.
[Merchandise Inventory Effects]

5. PP&E stands for property, , and equipment. [Common Property and

Equipment]

6. income is earned by allowing someone to use intellectual property or resources. [Other

Asset Transaction Effects]

30 | Domain 2 Lesson 2: Fill-in-the-Blanks Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Service Life and Depreciation Project Details
Project file
on Income Statements N/A

Estimated completion time

Service life is another word for useful life, the amount of time an asset will be 5 minutes
helpful to a company. Depreciation is the value an asset loses with time and use. Video reference
A company can use many forms of depreciation for its reporting, but the IRS Domain 2
accepts only one method: Modified Accelerated Cost Recovery System (MACRS). Topic: Depreciation Concepts and
Other methods include straight-line, sum-of-the-years digits, units-of- Terminology
production, and double-declining balance. Subtopic: Service Life and
Depreciation; Depreciation Expense
Depreciation expenses are listed on the income statement alongside other on Income Statements
expenses. Assets being depreciated are listed according to categories alongside Objectives covered
other business expenses having similar purposes. Expenses have natural debit 2 Accounting for Assets and Sales
balances. Income statements present revenues first, expenses second, and net Transactions
profit or loss last. 2.3 Define depreciation concepts and
terminology
Purpose 2.3.1 Describe principles relating
to service life and depreciation
Upon completing this project, you will better recognize terms referring to 2.3.2 Identify how depreciation
depreciation. expense is reported on income
statements
Steps for Completion Notes for the teacher
If time permits, list assets companies
1. Depreciation reduces the owner’s equity. Why?
would need to depreciate and the
a. Because expenses lower net income probable expense categories. For
example, Franky’s Fritters would
b. Because expenses are liabilities depreciate freezers with other
operational expenses but computers
2. Net profit/loss is the difference between revenues and expenses. with administrative expenses.
Why?

a. Because revenue equals the cash in the bank

b. Because revenue is income from sales, and expenses are costs

3. Expenses are listed on the income statement according to purpose. Why?

a. Because grouping expenses helps owners control cost categories

b. Because grouping expenses is easier for bookkeepers than listing them alphabetically

4. Operating, administrative, and other expense categories can contain depreciation expenses for different assets.
Why?

a. Because bookkeepers should divide expenses evenly by department

b. Because assets are used for different purposes throughout the company

31 | Domain 2 Lesson 2: Service Life and Depreciation on Income Statements Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Sales Transactions and Project Details
Project file
Merchandise Inventory N/A

Estimated completion time

Sales transactions can occur in one of two ways, a cash sale or on account. The 5-10 minutes
accounts affected are a revenue account, and either the cash account or an Video reference
account receivable billed to the customer. Cash and accounts receivable are Domain 2
assets with a natural debit balance. Sales would increase the amount in the cash Topic: Effects on the Accounting
account or increase the value of the receivable account. Revenue accounts have Equation
natural credit balances. A sale would increase the value of the revenue account Subtopic: Sales Transaction Effects;
Merchandise Inventory Effects
as well. A sales transaction entry would be a debit to cash or account receivable
and a credit to the revenue account of equal value. Objectives covered
2 Accounting for Assets and Sales
Once a sale is completed, another transaction is recorded to remove items sold Transactions
from inventory. Merchandise Inventory accounts have natural debit balances as 2.4 Describe the effect of asset and
inventory is an asset. The cost of goods sold expense account also has a natural sales transactions on the accounting
debit balance. These accounts are both increased with debits and decreased by equation
2.4.1 Describe the effect of sales
credits. A sale is recorded as a credit to merchandise inventory and a debit to
transactions on the accounting
the cost of goods sold in the amount of inventory valuation as calculated by equation
FIFO, LIFO, WAC, or another valuation method. 2.4.2 Describe the effect of
merchandise inventory on the
Purpose accounting equation

Upon completing this project, you will better understand the record-keeping Notes for the teacher
procedures for the sale of inventory. Discuss the difference between
inventory sales and property sales.
Steps for Completion Inventory sales exchange goods for
money as part of daily business.
1. When Franky’s Fritters opened on March 3, 2021, they had 1,842 fritters Property sales exchange goods for
in inventory, each costing $1.25 for a total inventory value of $2,302.50. money outside regular business, such as
selling a company vehicle or an old
The fritter shortage had caused the storefront to have a dramatic
computer.
increase in walk-in sales. The phones were also busy with orders from
customers hoping to have fritters delivered. By the end of business Tera
reported they had cash sales of $4,347 and total receivable sales of
$2,400; $2,000 to Minnie’s Mall and $400 to Mood Food. Freddy ran to check the freezers; there were only two
fritters left. Using the journal below, finish recording the day’s business.

Date Account Debit Credit

3/3/21 $4,347.00 $0.00
$2,000.00 $0.00
$400.00 $0.00
Fritter Sales Revenue
Cost of Fritters Sold
Frozen Fritter Inventory

32 | Domain 2 Lesson 2: Sales Transactions and Merchandise Inventory Intuit Certified Bookkeeping Professional Project Workbook, First Edition
Common Property, Equipment, Project Details
Project file
and Other Assets N/A

Estimated completion time

Property and equipment are inventoried in accounts separate from merchandise 5 minutes
inventory. Merchandise is intended to be sold, while property and equipment Video reference
are intended to be used. Property and equipment often carry a high cost and Domain 2
are a company’s fixed assets. Topic: Effects on the Accounting
Equation
Other items to consider include interest income and expense, royalty income, Subtopic: Common Property and
and how passive changes affect the financial statements. Equipment

Purpose Objectives covered

2 Accounting for Assets and Sales
Upon completing this project, you will better understand the effect of assets and Transactions
passive financial changes. 2.4 Describe the effect of asset and
sales transactions on the accounting
equation
Steps for Completion
2.4.3 Describe the effect of
1. is received as compensation for the use common property and equipment
entries on the accounting equation
of intellectual property.
2.4.4 Describe the effect of other
asset transactions on the
2. happen when companies pay interest on
accounting equation
money they owe.
Notes for the teacher
3. is a return generated by money held in Please note for students the distinction
banks or by receivable credit issued to customers. between expenses and liabilities.
Liabilities are money owed to others,
4. is money companies earn without sales and expenses are money spent.
and services.

5. are money spent by companies while

doing business.

33 | Domain 2 Lesson 2: Common Property, Equipment, and Other Assets Intuit Certified Bookkeeping Professional Project Workbook, First Edition