I need your advise. Business sells items. 25% customers pay next month. For Oct. cash collected was $21000 and $6500(accounts receivable) from Sept. Total-27500. What is revenue in this case?

Thank you,

Luiza

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If you are on cash basis accounting, this is simply the $27,500 received in the month.

However, I expect you are on accrual basis, in which case the sales made in the month are what you want to count instead of the cash received. Under accrual, you sold $21,000 that you already collected on, and another 25% that will be collected the following month. Therefore, the $21,000 is 75% of revenue for the month. Now it becomes an algebra problem:

$21,000/.75 = $28,000 

The $6,500 of accounts receivable is the 25% of the prior month's revenue, so it doesn't count for this month.

Good studying! 

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Our Balance Sheet Cramlet™ was one of our first, and continues to be popular among students. Most business textbooks contain a balance sheet, but this one is far more useful. Click the To learn more button to get to the interactive part, and see what I mean.

The balance sheet is broken up into four tabbed sections -- assets, liabilities, equity, and summary. Every tab, section header, and line item can be rolled over with your mouse to find in-depth descriptions that help put things in context.

I suggest you start your review by rolling over each of the tabs, as their explanations tell the story of the company's financial status. Within each tab, the section headers (current assets, fixed assets, etc.) give a definition of the items within that section. If you want a printout, the Statement button will always bring you back to the original full screen.

The balance sheet is a core financial statement featured in most business courses. This Cramlet™ has helped other students understand it, and it can help you as well.

Dear Professor Cram:

HI, i have a test..TOMORROW MORNING.. and need big time help on Accounting using "T" Accounts... is there any way you could help me out and explain to me the basics... Thankyou

Brittany, Saskatchewan

Dear Professor Cram:

Ellen borrowed $500 at 12% simple interest, to be repaid in 8 equal monthly installments of $70. If she pays off the loan when she makes her 4th payment, how much will she save in finance charges under the rule of 78s?

Charles, SFC USAR

Thanks for your question, Charles.

This a combination of Simple Interest and Rule of 78s. If you haven't already, you may want to review our tutorial on interest rates.

Simple interest is calculated on the original amount borrowed, and is therefore better suited for short-term borrowing and single payment loans than for long-term installment loans.

Simple Interest = Principle x Rate x Time

The Rule of 78 is a method of allocating interest charges for the life of a loan to the periods within the loan. Under this method, interest is calculated for the life of the loan, and allocated to each month by proportion using reverse sum of the digits methodology. You start by adding up the numbers of months for the note. In your example of an 8 month loan, counting month 1, plus month 2, and so forth through month 8 is:

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36

With 12 months this totals 78, and hence the name, the Rule of 78s.

The interest total for the loan life (Interest = Rate x Time x Principle) is divided by the sum of the digits (78 in this example) and applied in reverse proportion across the life of the loan. Thus, 8/36 of the interest applies to the first month, 7/36 to the second month, and so forth down to 1/36th at the end of the 8th month.

To solve this problem you need to calculate the full amount of interest, then allocate it to the months, and add up the parts saved by paying off early.

We are told she is going to repay the $500 loan in 8 installments of $70:

$560 total - $500 principal = $60 interest

(That is 12% and it was NOT an annual rate! Wow!) So the $60 interest is what she is trying to save part of by paying in full with the 4th payment. The last four months count as 1/36 + 2/36 + 3/36 + 4/36 = 10/36 of the interest, and 10/36 x $60 = $16.67 of interest saved.

That is not very much savings from prepaying the loan. Hence - try to avoid rule of 78s loans!

I hope this helps. Let us know if you need anything else.

Dear Professor Cram:

I am having trouble with journal entries. I know I am supposed to first make the debit entry and then make the credit entry. I keep getting confused by whether the debits and credits are increasing or decreasing the accounts. Why don't debits always decrease an account? Please just tell me exactly what is a debit and a credit? Why is this so confusing? I need to get this sorted out in my head.

John W., NY

Thank you for your interest in College-Cram.com and thanks for your question.

Your question about debits and credits is not unusual. A lot of people are confused by these terms. Part of this comes from the terms being used so widely but from different perspectives and for different purposes. As an accounting student, you don't have to worry about what the banker meant by "crediting your account" which makes sense from the bankers accounting system but not yours. What you need to remember is the accounting secret: Debit and Credit only refers to which side of a two column ledger the number appears on - left or right.

There was a highly respected accountant who came into his office every morning and after he got his coffee, sharpened his pencil, and got files arranged to use them, he unlocked and opened the center drawer of his desk, peered inside for just a moment, and then locked it back and began his work for the day. He did this for forty years. Same thing, every morning. People observed him doing this over the years, but no one ever asked him about it. There was quite a bit of speculation, but since he always kept the drawer locked, no one had been able to sneak a peek. At his retirement party, one of his friends couldn't resist asking him just what that daily ritual was about. He went to his desk, unlocked the center drawer, and removed a worn, faded, index card. It said "Debits on the left. Credits on the right."

That is all a debit or a credit amounts to. Debits go on the left and credits go on the right. You are right that these affect different accounts differently.

The Smartacus Study Sheet™ is a new twist on this age-old study technique. Each one contains definitions, formulas, and explanations that you can use to prepare for your next exam. Further, it includes links to all the relevant Cramlets™ in case you need more than simple review.

The Smartacus Study Sheet™: Depreciation is the first of many of these Cramlets™. It features:

• definitions for key terms such as asset, depreciation, salvage value, and accumulated depreciation.
• sections for each depreciation method -- straight-line, units of production, sum-of-the-years' digits (SYD), declining balance, and double declining balance. Each section gives explanation of how and when the method is used, the appropriate formula to use, and hot links to launch Bottomless Worksheets (if you need some extra practice) or the Cramlets™ that teach you that method (if you need a study it a bit more).
• more hot links to other Cramlets™ that might be helpful to understanding the topic. In this case, links are provided to review and study the balance sheet and to try the virtual depreciation consultant.

We predict that Smartacus Study Sheets™ will be among our most helpful Cramlets™ and, with depreciation being such a popular topic, that this Cramlet™ will be particular useful. The sheets themselves are free to all students to review and print, and all of the Cramlet™ links are available for free to every student with a free sign-up.