• Accounting Cycle

    Closing Entries Visual

    Peggy Helms, Wayne Community College

    Using a visual with a discussion of the closing entries seems to help students more easily learn the process. Many students know someone named Reid. The letters in that name can stand for the Closing Process:
    R = Revenues are closed to Income Summary
    E = Expenses are closed to Income Summary
    I = Income Summary is closed to Retained Earnings
    D = Dividends are closed to Retained Earnings. (If the company is a proprietorship, D could be for Drawing.) My attached visual is rather basic but it works!

    Closing Entries Visual

    FIFO and LIFO Inventory

    Submitted by Lauren Smith, Front Range Community College

    I use different colored Duplo/Lego blocks to illustrate how inventory flows through the system using FIFO and LIFO. I took one of the exercises from the Accounting 1 book we use and substituted colors for the dollars. The students get the benefit of 'seeing' how FIFO or LIFO work, before they actually apply numbers to the cost flow. Since I started doing this about five years ago, I've had great success rate on the FIFO/LIFO problem on the exam over that chapter.

    Understanding the Concept of the Operating Cycle

    Submitted by Myrtle Clark, University of Kentucky

    This teaching tip applies the four-step concept teaching process to the operating cycle. Follow the information outlined in the handout: Operating Cycle Exercise.

    Rationale

    When teaching any concept, the best approach is a four-step process:

    1. Define the concept.
    2. Using visual aids, explain briefly in abstract terms:
      • The purpose of the concept.
      • What the concept means.
       
    3. Give a brief, concise example of the concept.
    4. Involve the student in developing the concept through the use of a simple case that illustrates and expands the concept applying it to a real world situation.

    Additional Materials

    Operating Cycle Exercise handout

    Outline for Revenue Recognition

    Submitted by Myrtle Clark, University of Kentucky

    The following steps are helpful in teaching revenue recognition:

    1. Define revenue.
    2. State that revenues are recognized when they are:
      1. Realized or realizable.
      2. Earned.
       
    3. Define and discuss realized, realizable, and earned.
    4. Discuss the influence of certainty on the recognition of revenue. Influence of certainty (or uncertainty) on revenue recognition

    Due to perceived certainty (or uncertainty), revenue recognition can be viewed as follows:

    1. Give examples of each of the above.
    2. State that point of sale is the typical method. Explain why. The other approaches can be viewed as exceptions to the point of sale due to the level of perceived certainty (or uncertainty).
    3. Discuss complicating factors to point of sale recognition:
      1. Credit sales, discounts, and bad debts.
      2. The existence of return privileges on merchandise sold.
       

    Rationale

    In teaching revenue recognition, students should be made aware that recognition is a judgment call that depends on the level of certainty (or uncertainty) associated with realization. The greater the level of perceived uncertainty regarding realization, the greater is the tendency for accountants not to defer recognition of revenue.

    Purchase Discounts

    Submitted by Myrtle Clark, University of Kentucky

    The following exercise is helpful in teaching the theory and methods of accounting for purchase discounts. The same example is used throughout the exercise. It accomplishes the teaching goals (student learning objectives) that follow.

    How to Use the Exercise

    1. Begin by briefly discussing purchase discounts in theoretical terms.
    2. Pass out copies of the exercise (Purchase Discounts Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. The exercise will be about three pages. The students work on the exercise in small groups.
    3. Go over the exercise with the class. You may use overheads. Students prefer PowerPoint.

    Student Learning Objectives

    1. Record transactions using the gross method and the net method assuming:
      1. Payment is made within the discount period.
      2. Payment is made after the discount period.
       
    2. Explain the effect of each method on the income statement (in particular, net purchases).
    3. Understand when the selection of approach (gross method or net method) makes a difference on the income statement.
    4. Know which method provides a measure of net purchases that is more "representationally faithful."

    By the use of the simple exercise case, students will see for themselves when and why each method makes a difference on published financial statements. They will also be challenged to question which method provides the better measures.

    Additional Materials

    Purchase Discounts Exercise handout

    Sales Discounts

    Submitted by Myrtle Clark, University of Kentucky

    The following exercise is helpful in teaching the theory and methods of accounting for sales that have sales discounts. The same example (or case) is used throughout the exercise. It accomplishes the teaching goals (student learning objectives) that follow.

    How to Use the Exercise

    1. Begin by briefly discussing purchase discounts in theoretical terms.
    2. Pass out copies of the exercise (Sales Discounts Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. The exercise will be about three pages. Students work on the exercise in small groups.
    3. Go over the exercise with the class. You may use overheads. Students prefer PowerPoint.

    Student Learning Objectives

    1. Record transactions using the gross method and the net method assuming the following:
      1. Payment is received within the discount period.
      2. Payment is received after the discount period.
       
    2. Describe the effect of each method on the income statement (in particular, net sales).
    3. Determine when the selection of approach (gross method or net method) makes a difference on the income statement.
    4. Know which method provides a measure of net sales that is more "representationally faithful."

    By the use of the simple exercise case, students will see for themselves when and why each sales discounts method makes a difference on published financial statements. They will also be challenged to question which method provides the better measures.

    Additional Materials

    Sales Discounts Exercise handout

    M & M Project

    Submitted by Pat Creech, Northeastern Oklahoma A&M College

    This project covers the accounting equation and the double entry system. It also shows how the income statement accounts fit into the accounting equation.

    Place empty cups on paper according to type of account. For each business transaction, add or take away the appropriate colored M&Ms from individual cups. Each M&M represents $100. Remember each transaction requires two actions.

    Problem #1

    1. You decide to start a new business.  You write a check from your personal bank account for $2000 to start the business.
    2. You need a little more cash to get the business started, so you borrow $1000 from the bank, signing a note.
    3. You purchase $200 worth of supplies, paying cash.
    4. You purchase some used equipment for $500, again paying cash.
    5. You pay your rent of $400.
    6. You complete a job for Customer A and collect $300 cash from them.
    7. You complete a job for Customer B and bill them $600.
    8. You pay your utilities of $100.
    9. You pay your assistant’s salary, $200.
    10. Customer B pays you $200 of what he owes you.
    11. You pay $300 to the bank on your note.
    12. You determine your income for the period, and taking none out for yourself, add it to your retained earnings.

    Check to see if your equation is still balanced.

    Problem #2

    1. Your grandfather dies and leaves you $1500.  You use it to form a small corporation.
    2. You purchase equipment for $300, signing a note.
    3. You purchase supplies for $200, paying cash.
    4. You pay rent, $600.
    5. You complete a job for Customer A.  She pays you $800.
    6. You complete a job for Customer B.  He pays you $500 and agrees to pay you the remaining $300 later.
    7. You pay salaries of $500.
    8. You pay utilities of $100.
    9. Customer B pays you $200 on his account.
    10. You pay $100 on your equipment note.
    11. You determine your income for the period and taking none out for yourself, add it to your retained earnings.

    Rationale

    This project works because it gives students a hands-on approach to the double entry system.  They see how every transaction affects the accounting equation.

    Additional Materials

    Accounting Equation handout

    Supplies for Each Team

    • 1 Balance Sheet (Accounting Equation) Page – 8 ½ x 14 landscape
    • 1 Income Statement (Revenue – Expenses) Page – 8 ½ x 11 landscape
    • 11 Small Dixie Cups Labeled as follows:
      Accounts Receivable, Capital Stock, Cash, Equipment, Fees Earned, Notes Payable, Rent Expense, Retained Earnings, Salaries Expense, Supplies, and Utilities Expense
    • 1 Large Bag of M&Ms distributed as follows:
    • Assets = Green
    • Liabilities = Blue
    • Owner’s Equity = Yellow (Green = Blue + Yellow)
    • Revenues = Orange
    • Expenses = Red (Orange – Red = Yellow)
     

    Format and Ordering of Financial Statements

    Submitted by Debbie Gahr, Waukesha County Technical College

    I created index cards listing many of the accounts and headings used on an income statement and balance sheet. Then, I had my students spread out on the floor and create the financial statements in the proper order; almost like a puzzle.

    For my hands on learners, it is a great way to get familiar with the account names without needing to worry about the numbers. First they need to figure out if it goes on the income statement or balance sheet. Then, if it goes on a balance sheet, is it an asset, liability or equity account? Then, what order do they get listed it? If it is on the income statement, students have to first decided if is it a revenue or expense account, then what order to list them. My students really liked doing this and we would practice once per class period for a few weeks until they had it down.

    I created index cards with the account names and headings on it. I laminated the cards so I could keep using them.

    Gross Revenues Are Not Always What They Seem

    Submitted by John Mills, University of Nevada - Reno

    The casino industry presents two very unique situations for the recognition of revenues. The gaming industry accounting guideline states that gaming revenue is recognized and reported by a casino as the win from gaming activities, that is, the difference between gaming wins and losses, not the total amount wagered. But what is even more unique is the reporting of other revenues that could include income defined as promotional allowances or comps.

    At a minimum, most gaming properties have a hotel, several restaurants, and a casino with various table games and slot machines. This is a very competitive environment with different properties each trying to attract customers to gamble. For example, Las Vegas has more than 120 gaming properties that generate revenues of over $1 million. One of the primary means of getting customers on the property is by offering promotional allowances, or comps, consisting of discounted or free hotel rooms, meals, or beverages. Some gaming properties hold as much as 25% of their total hotel rooms open for their special gaming customers. The expectation is that once the customers are on the property, they will play the various games in the casino and hopefully generate enough gaming revenues to not only offset the cost of the comps but also generate more revenues than if the comps had not been given.

    The guideline of the gaming properties industry indicates that to induce customers to gamble at an establishment, casinos give promotional allowances (complementary or comps) representing goods or services that would be accounted for as revenue if sold. The guideline suggests that the retail amount of these promotional allowances be disclosed in the financial statements by including it in gross revenues, since the gaming property has provided a service to the customer in terms of a room or meal. The retail amount is then offset by deducting it from gross revenues on the income statement. The gaming properties therefore book revenues equal to the retail value of the room or meal even though these services do not generate any actual cash flow. The cost of providing promotional allowances is included in the casino’s costs and expenses. Thus, when viewing the income statement of some of the high-roller gaming properties, as much as 15% of the total revenues shown are noncash comps for hotel rooms and other services.

    From an accounting perspective, given that gaming properties recognize revenues for the “comped” room, the guideline suggests that the retail rate should be used. Now the question becomes "What is the actual retail rate?" Assume that the gaming property has a normal retail room rate of $100, which is set on a yearly basis. However, actual room rates depend on competition, conventions, and other events that take place during the year.

    For example, January is normally a slow time, and a room can be booked for $25 a night. On the other hand, in September, a computer convention attracts over 80,000 people beyond the normal tourist trade, and a gaming property could charge $200 for a room. The question thus becomes which price should be used for the “comped” rooms. The guideline suggests the use of the retail room rate but does not specify whether the rate should be the normal rate or the rate at the day of the transaction. Any of these rates may overstate revenues in some time periods and understate revenues in other time periods. Of course, from a cash flow perspective, revenues will always be overstated, since no revenues or cash are actually generated by issuing comps. So, even though many gaming corporations show comps in gross revenue, others argue that because no specified revenues or cash are generated, they should not be included in the income statement but given as a footnote.

    Rationale

    Revenue recognition has always been a problem, not only for corporations but also for the accounting profession. The FASB has issued the following guideline:"The revenue recognition principle provides that revenue is recognized when it is realized or realizable and it is earned." While this guideline is easily applied to many normal situations, many unique situations within specific industries do not always fall within this guideline.

    Applying Debits and Credits

    Submitted by Joanne Salas, Olympic College Bremerton WA

    I manipulate the expanded accounting equation as a formula so that it appears as a INCREASE/NORMAL (positive) balance picture, and teach students that a NEGATIVE effect is simply the opposite! SIMPLY stated: ADE=LOR for the POSITIVE/normal balance side (and vice versa); LOR=ADE for the DECREASE side.

    My students make up a 3x5 index card that serves as their "book mark" and as we go through the first six chapters to learn the accounting cycle, they use that visual to help them recognize when to debit accounts and when to credit them based on increase/decrease affect of the transaction. It works! For those most a-studious to those that give very little time; if anything, they walk away with transaction analysis quickly and clearly understood!

    Rationale

    I can be more assured of FAST results with student comprehension and application as we use this simple visual queue from start to finish, but normally, by finish, debit/credits is sub-conscious knowledge! I always afford forward thinking in my accounting classes, and I cover this at the conclusion of chapter 1 as I introduce what we'll be learning in the next few chapters! It is truly tremendous help to the success of the next few chapters, regardless of what textbook we're using! All I know is that I have my students teaching my colleagues, and I have found out that my colleagues are using this approach too!

    Additional Materials

    It would just be a matter of including the visuals and explanations, and examples of how to apply, right up front!