First-year accounting classes can be challenging, especially because the problems you’re likely to see on your homework may look nothing like the problems you’ll have on your quizzes and tests. Frustrating…right?
When you first start accounting class everything is new. I mean EVERYTHING! Quickly, Accounting 101 doesn’t seem like basic accounting, it seems like the hardest thing you’ve ever had to do!
It’d be nice if the class started with repetitive accounting problems so you can, at least, get used to these new concepts. Sort of like accounting practice. But typically, there are a variety of questions testing multiple concepts.
Unfortunately, this approach doesn’t build knowledge or confidence, instead, it usually builds confusion and frustration!
To get a better idea of what I’m talking about, let’s take a look at…
The Top 3 Accounting Problems That Trip Most Students Up
1. Smith Co. borrowed $25,000 on October 1, 2020 by signing a 6%, six month note. What is the accrued interest at December 31, 2020?
2. Jan Co. made a credit sale with terms of 3/10, n/30 for $1,000 on March 1st. A return of $200 was granted on March 6th. Jan Co. was paid in full on March 8th. How much did they receive?
3. At December 31, 2019, Kraft Co. overstated their inventory by $10,000. No corrections to this error were made in 2019 or 2020. As a result of this error, their Net Income is:
A) Understated in 2019 & 2020
B) Overstated in 2019 & 2020
C) Understated in 2019 & overstated in 2020
D) Overstated in 2019 & understated in 2020
Why Are These Problems So Tough?
As an accounting tutor, there are two situations I frequently see.
The first is when a student feels good about getting any answer that matches one of the choices.
It’s easy to feel like you got the correct answer when your answer matches one of the choices, but don’t be fooled! By design, most accounting questions allow you to arrive at some or all of the choices. This is how questions test your understanding of the accounting process. In this situation, the student is literally playing a guessing game because they’re able to arrive at some or all of the choices, even when they get the WRONG ANSWER!
The second situation occurs when the student DOESN’T think the questions are difficult, but the choices make them SECOND-GUESS their answer.
This is self-sabotage. They arrive at the correct answer but don’t trust their understanding of the material they’ve been taught. Once they solve the problem correctly, they start overthinking, which leads to trying to figure out the other choices. This is okay if you’re trying to prove your answer, but in many instances, it leads to second-guessing the process that resulted in getting the correct answer. This causes doubt and confusion which may lead to changing from the correct answer to an incorrect choice.
To be successful in answering accounting problems, you need to realize that, more often than not, it’s possible to arrive at some or all of the given choices based on the information stated in the problem.
For example, in the first accounting test question above, we can calculate all the choices as follows:
Choice A: $25,000 X 6% X (2 months ÷ 12 months) = $250.
Choice B: $25,000 X 6% X (3 months ÷ 12 months) = $375.
Choice C: $25,000 X 6% X (6 months ÷ 12 months) = $750.
Choice D: $25,000 X 6% = $1,000.
In order to answer this problem correctly, you have to know and properly apply the accounting formula they’re asking about in the question. Otherwise, you’ll just be guessing.
To make matters even more confusing, you’re given additional information that isn’t necessary to solve this problem. Oftentimes, students struggle to learn accounting because they’re not sure what information is relevant. Students get hung up on the fact that it’s only a six-month note. But, the fact that it’s a six-month note is irrelevant to this problem. Once you know the process, you’ll spot and ignore the irrelevant information.
The second accounting test question is similar to the first question in that you can arrive at all the choices based on the info given in the problem. However, with question 2, you have to know some terminology and an accounting process.
For example, what does “3/10, n/30” mean? These are payment terms. These payment terms mean you get a 3% discount if the net amount due is paid within 10 days (3/10), otherwise the net amount is due in 30 days (n/30).
Once you know this information, you have to figure out IF the discount applies. If it applies, is the discount applied before or after the $200 return?
As you can see with question 2, there are just enough options to make this seemingly simple question difficult. So, for a question like this, you have to understand the sales process, how a return affects a sale, discount terms, and if terms are applied to returns. Otherwise, you’ll just be guessing.
The third accounting test question is different than the first two accounting problems because you can’t arrive at all the choices. For this question, you have to understand the relationship between the Ending Inventory balance, Cost of Goods Sold, and Net Income. A lot of times students don’t even consider Cost of Goods Sold in a problem like this because the problem doesn’t mention anything about Cost of Goods Sold.
So, how do you know to consider account information relating to Cost of Goods Sold? You know because we’re talking about Ending Inventory and are asked to solve for information related to Net Income.
Ending Inventory has an inverse relationship with Cost of Goods Sold. This means that as Ending Inventory goes down, Cost of Goods Sold goes up, and vice versa.
Ending Inventory also has a direct relationship with Net Income which means as Ending Inventory goes down, Net Income goes down, and vice versa.
This account information makes sense because if Ending Inventory goes down, Cost of Goods Sold goes up, which means Net Income goes down, and vice versa. Understanding the inverse and direct relationships between the different accounts is the key to answering this question correctly. Otherwise, you’ll just be guessing.
A Foolproof Process For Solving Even The Most Challenging Accounting Problems With Ease
Here’s the deal, as a student that’s new to the world of accounting, it’s hard to know the assumptions, processes, concepts, and steps needed to consistently solve accounting problems correctly. Most accounting classes only provide a couple of example problems per concept and the accounting solutions aren’t always clear.
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