College Accounting, Loose-Leaf

1 Welcome to Accounting: Introduction and Financial Statements 1-1

The Importance of Accounting 1-2

Why Study Accounting? 1-2

Who Uses Accounting Information? 1-4

Business Types and Classifications 1-7

Types of Businesses That Use Accounting 1-7

Business Classifications 1-9

The Building Blocks of Accounting 1-11

Ethics in Financial Reporting 1-11

Accounting Standards 1-12

Principles and Assumptions 1-13

The Four Financial Statements 1-16

Income Statement 1-16

Owner’s Equity Statement 1-18

Balance Sheet 1-20

Statement of Cash Flows 1-22

The Financial Statement Connections 1-23

Careers in Accounting 1-27

Public Accounting 1-27

Private Accounting 1-27

Governmental Accounting 1-28

Forensic Accounting 1-28

2 The Accounting Equation and Transaction Analysis 2-1

The Accounting Elements 2-2

Assets 2-2

Liabilities 2-3

Owner’s Equity 2-4

Basic Accounting Equation 2-5

Accounting Equation in Action 2-5

Business Transactions 2-8

Defining Business Transactions 2-8

The Account 2-9

Transaction Analysis 2-10

Example Transactions 2-11

Summary of Transactions 2-13

Revenues and Expenses 2-15

Revenues 2-15

Expenses 2-16

Expanding the Accounting Equation 2-17

Expanded Accounting Equation 2-18

Transaction Analysis Using the Expanded Accounting Equation 2-19

Summary of Transactions 2-22

3 The Recording Process: Debits and Credits 3-1

Debits and Credits 3-2

The T-Account Form Using Debits and Credits 3-2

Balancing an Account 3-3

Debit and Credit Rules 3-5

Normal Balances 3-9

Summary of Debit/Credit Rules 3-10

Chart of Accounts 3-11

Using Debits and Credits 3-14

Debit-Credit Analysis 3-14

Designer Dinners—Basic Transactions 3-15

Summary of Basic Transactions 3-17

Designer Dinners—Additional Transactions 3-18

Summary of Expanded Transactions 3-23

4 The Recording Process: The Journal, Ledger, and Trial Balance 4-1

Using a Journal in the Recording Process 4-2

Business Documents 4-2

Steps in the Recording Process 4-3

Using the Journal 4-4

Posting to the Ledger 4-9

The Ledger 4-9

Posting 4-13

The Recording Process Illustrated 4-14

Summary of Transactions 4-26

The Trial Balance 4-30

Trial Balance Benefits 4-31

Steps for Preparing a Trial Balance 4-32

Dollar Signs and Underlining 4-33

Locating Errors 4-34

Limitations of a Trial Balance 4-36

5 Adjusting the Accounts and Preparing an Adjusted Trial Balance 5-1

Reasons for Adjusting Entries 5-2

Fiscal and Calendar Years 5-2

Recognizing Revenues and Expenses 5-3

The Need for Adjusting Entries 5-4

Adjusting Entries 5-6

Supplies 5-6

Insurance 5-9

Depreciation 5-12

Salaries and Wages 5-15

Summary of Basic Relationships 5-17

The Adjusted Trial Balance 5-21

Preparing the Adjusted Trial Balance 5-21

Preparing Financial Statements 5-22

6 Preparing a Worksheet and Completing the Accounting Cycle 6-1

The Worksheet 6-2

The Purpose of the Worksheet 6-2

Steps in Preparing a Worksheet 6-3

Preparing Financial Statements from a Worksheet 6-10

Preparing Adjusting Entries from a Worksheet 6-10

The Closing Process 6-14

Temporary and Permanent Accounts 6-15

Preparing Closing Entries 6-16

Closing Entries Illustrated 6-18

Posting Closing Entries 6-22

Preparing a Post-Closing Trial Balance 6-26

The Accounting Cycle 6-28

Steps in the Accounting Cycle 6-28

Correcting Entries—An Avoidable Step 6-29

7 Accounting for Merchandising Companies: Purchases 7-1

Merchandising Operations 7-2

Merchandising Company Accounts 7-2

Merchandising Company Operating Cycle 7-4

Flow of Costs 7-5

Two Inventory Systems—Perpetual and Periodic 7-6

Purchases and Freight Costs 7-9

Purchase of Inventory 7-10

Payment of Freight Costs 7-12

Returns/Allowances and Payments 7-16

Purchase Returns and Allowances 7-16

Payment for Inventory Purchases 7-18

Summary of Purchase Transactions 7-22

8 Accounting for Merchandising Companies: Sales 8-1

Sales, Sales Taxes, and Freight Costs 8-2

Timing and Business Documents 8-2

Recording the Sale of Merchandise 8-2

Credit Card Sales 8-6

Sales Taxes 8-8

Payment of Freight Costs by the Seller 8-10

Sales Returns and Allowances and Receipts of Payment 8-12

Sales Returns and Allowances 8-12

Receipt of Payment for Sales 8-15

Summary of Sales Transactions 8-18

9 Accounting for Merchandising Companies: Worksheets and Financial Statements 9-1

Adjusting Entries and Worksheet for a Merchandising Company 9-2

Preparing Adjusting Entries for Unearned Revenue 9-2

Adjusting Entries for a Merchandising Company 9-5

Using a Worksheet 9-6

Financial Statements for Merchandising Companies 9-10

Balance Sheet 9-10

Single-Step Income Statement 9-10

Multiple-Step Income Statement 9-12

The Closing Process for Merchandising Companies 9-19

Closing Entries for Merchandising Companies 9-19

10 Accounting Information Systems, Subsidiary Ledgers, and Special Journals 10-1

Basic Accounting Information System Concepts 10-2

Accounting Information Systems 10-2

Computerized Accounting Systems 10-3

Subsidiary Ledgers 10-7

The Need for Subsidiary Ledgers 10-7

Subsidiary Ledger Example 10-8

Special Journals 10-11

Purpose of Special Journals 10-11

Knowing Which Special Journal to Use 10-13

Special Journals: Purchases Journal and Cash Payments Journals 10-16

Purchases Journal 10-16

Cash Payments Journal 10-20

Special Journals: Sales Journal and Cash Receipts Journal 10-26

Sales Journal 10-26

Cash Receipts Journal 10-30

Effects of Special Journals on the General Journal 10-35

11 Inventories 11-1

Classifying and Determining Inventory 11-2

Classifying Inventory 11-2

Determining Inventory Quantities 11-3

Inventory Cost Flow Methods and Financial Effects 11-6

Specific Identification 11-7

Cost Flow Assumptions 11-8

Financial Statement Effects of Cost Flow Methods 11-13

Using Inventory Cost Flow Methods Consistently 11-15

Inventory Valuation and the Effects of Inventory Errors on the Financial Statements 11-17

Lower-of-Cost-or-Net Realizable Value 11-17

Effects of Errors on the Financial Statements 11-18

Estimating Inventories 11-22

Gross Profit Method 11-22

Retail Inventory Method 11-23

Inventory Cost Flow Methods for the Perpetual Inventory System 11-26

First-In, First-Out (FIFO) 11-27

Last-In, First-Out (LIFO) 11-27

Average-Cost 11-28

12 Cash, Banking, and Internal Controls 12-1

Internal Controls and Cash 12-2

Internal Control 12-2

Cash Receipts 12-2

Cash Payments 12-3

Voucher System Controls 12-3

Banking Procedures 12-5

Checking Account 12-5

Electronic Banking 12-6

Writing Checks 12-8

Making Deposits 12-10

Bank Statement 12-13

Bank Reconciliation 12-16

The Need for a Bank Reconciliation 12-17

Reconciling Items 12-18

Preparing a Bank Reconciliation 12-19

Journal Entries Required After a Bank Reconciliation 12-24

Petty Cash 12-28

Establishing the Petty Cash Fund 12-28

Making Payments from the Petty Cash Fund 12-29

Replenishing the Petty Cash Fund 12-30

Change Fund 12-32

Establishing and Maintaining a Change Fund 12-33

Cash Over and Short 12-34

Fraud and Internal Controls 12-36

Fraud 12-36

The Importance of Internal Controls 12-38

Internal Control Activities 12-39

13 Payroll Accounting: Employee Taxes 13-1

Determining Employee Payroll 13-2

Overview of Payroll 13-2

Steps in Computing Employee Payroll 13-3

Recording the Payroll 13-14

Maintaining Payroll Department Records 13-14

Recognizing Payroll Expenses and Liabilities 13-17

Recording Payment of the Payroll 13-19

Internal Control for Payroll 13-22

Payroll Fraud 13-22

Proper Internal Controls 13-22

14 Payroll Accounting: Employer Taxes 14-1

Determining and Recording Payroll Taxes 14-2

FICA Taxes 14-2

Federal Unemployment Taxes 14-4

State Unemployment Taxes 14-5

Summary 14-5

Recording Employer Payroll Taxes 14-7

Filing and Paying Payroll Taxes 14-9

FICA Taxes and Federal Income Tax 14-9

Federal Unemployment Tax 14-16

State and City Taxes 14-21

Wage and Tax Statement 14-21

Recording Payment of Taxes 14-23

Workers’ Compensation Insurance 14-25

Computation of Workers’ Compensation Premium 14-25

Recording Workers’ Compensation Premium Payment 14-26

Year-End Adjustment for Workers’ Compensation Premium 14-27

Index I-1