One commonly used technique in accounting is to back out certain numbers from the information available. We do this by looking at the change of certain account. For example, if we know the opening balance of net inventories ($1,000), the total purchase during the period ($2,000), and the closing balance of net inventories ($500), we can back out the cost of sales ($2,500). In accounting, people call the number backed out a "plug." Opening Balance of Net Inventories 1,000 + Total Purchase 2,000 - The Cost of Sales (2,500) "Plug" Closing Balance of Net Inventories 500 Of course, if we know the cost of sales first, we can also back out the total purchase as a plug. This technique seems very simple, but is very useful in accounting analysis, because we usually know the opening and closing balances of certain account and need to find out the information about transactions that change the account balance. For example, if the opening balance of allowance for bad debt is $4,000, the closing balance is $5,000, and the bad debt expense is $4,000, we can back out the amount of bad debt write-off $3,000 as a plug. Opening Balance of Allowance for Bad Debt 4,000 + Bad Debt Expense 4,000 - Write-Off (3,000) "Plug" Closing Balance of Allowance for Bad Debt 5,000 In order to back out certain unknown number as a plug, we need to know what transactions would change the balance of certain account. In addition to the two accounts illustrated above, so far we have at least covered the following accounts (these would be enough for the midterm): Opening Balance of Retained Earnings + Net Income - Dividend Declared Closing Balance of Retained Earnings Opening Balance of Gross Accounts Receivable + Sales on Credit - Cash Collection from Customers - Write-Off Closing Balance of Gross Accounts Receivable 2 Opening Balance of Net Accounts Receivable + Sales on Credit - Bad Debt Expense - Cash Collection from Customers Closing Balance of Net Accounts Receivable Opening Balance of Net Finished Goods Inventories + Transfer from Work-in-Progress Inventories - The Cost of Sales Closing Balance of Net Finished Goods Inventories Opening Balance of Net Work-in-Progress Inventories + Addition to WIP Inventories (raw materials, direct labour, etc.) - Transfer to Finished Goods Inventories Closing Balance of Net Work-in-Progress Inventories Opening Balance of Net Raw Material Inventories + New Purchase - Transfer to WIP Inventories Closing Balance of Raw Material Inventories Opening Balance of Deferred Revenues + Cash Received in advance from customers - Revenues recognized Closing Balance of Deferred Revenues.