Ch.5 · AFUA
✗ "AFUA has a credit balance so it must be a liability."
✓ AFUA is a CONTRA ASSET. Both liabilities and contra assets have credit balances. AFUA reduces AR on the balance sheet.
Ch.5 · Write-Off
✗ Recording Bad Debt Expense when writing off a specific account.
✓ Write-off: Dr. AFUA / Cr. AR. No bad debt expense — it was recorded at year-end estimation. No effect on total assets.
Ch.5 · Contra Revenues
✗ Classifying Sales Returns and Sales Allowances as expenses.
✓ Contra revenues (debit normal balance) reduce revenue. They are NOT expenses. Expenses represent costs of generating revenue; contra revenues reduce revenue itself.
Ch.6 · FIFO Beginning Inventory
✗ Forgetting beginning inventory when calculating FIFO COGS.
✓ Beginning inventory was purchased BEFORE any current-period purchases — always sold first under FIFO. Include it as your first batch.
Ch.6 · Inventory Turnover
✗ Using ending inventory instead of average inventory in the ratio.
✓ Use average: (Beginning + Ending) ÷ 2. COGS is a full-period amount; balance sheet items must be averaged over the same period.
Ch.6 · Inventory Cost
✗ Including advertising costs in the inventory balance.
✓ Advertising is expensed immediately. Only costs to ACQUIRE and GET READY FOR SALE go in inventory (purchase price, freight-in, etc.).
Ch.7 · Depreciation Concept
✗ "Depreciation records the decrease in market value of an asset."
✓ Depreciation is COST ALLOCATION over time — not a valuation process. Market value is completely irrelevant.
Ch.7 · Land
✗ Depreciating land along with buildings and equipment.
✓ Land has an INDEFINITE useful life — NEVER depreciated. Land improvements (parking lots, fences) ARE depreciated.
Ch.7 · Asset Disposal
✗ Forgetting to update depreciation before recording an asset disposal.
✓ Always record depreciation up to the exact disposal date first. Otherwise book value is wrong and your gain/loss will be incorrect.
Ch.7 · Salvaged Materials
✗ Adding or ignoring cash received from selling salvaged building materials.
✓ Cash from salvaged materials REDUCES the cost of land. It's a credit against the land cost.
Ch.7 · Capitalize vs. Expense
✗ "Repairing a broken part should be capitalized."
✓ Routine repairs restoring original capability are EXPENSED. Only improvements extending life or adding new capability are capitalized.
Ch.3 & Ch.8 · Month Counting
✗ "March to December = 9 months (12 − 3 = 9)" or "Sep to Dec = 3 months."
✓ March through December = 10 months. September through December = 4 months. List each month; never subtract month numbers.
Ch.8 · Deferred Revenue
✗ "Deferred Revenue is a revenue account because it has the word 'revenue.'"
✓ Deferred Revenue is a LIABILITY. The company owes goods/services to the customer. It becomes revenue only when earned.
Ch.4 · NSF Check
✗ Thinking the NSF check is a bad check written BY the company.
✓ NSF = a customer's check to you bounced. Reverse your deposit: Dr. AR / Cr. Cash. Appears as a deduction on the BOOK side of the bank reconciliation.
Ch.4 · Bank Rec Journal Entries
✗ Recording journal entries for deposits in transit or outstanding checks.
✓ These go on the BANK side — they're already in the company's books. Only BOOK SIDE items (NSF, bank fees, interest earned) need journal entries.
Ch.4 · SOX Scope
✗ "The Sarbanes-Oxley Act applies to all US companies."
✓ SOX applies ONLY to companies required to file with the SEC. Private companies are not subject to SOX.
Ch.5 · Sales Tax
✗ Including sales tax collected as revenue or subtracting it as a contra revenue.
✓ Sales tax collected from customers is a CURRENT LIABILITY payable to the government — not revenue, not a contra revenue, not an expense.