Robert L. Dansby, Ph.D. Columbus Technical College Columbus, Georgia Burton S. Kaliski, Ed.D. Southern New Hampshire University Manchester, New Hampshire Michael D. Lawrence, MBA, CPA, CMA Portland Community College Portland, Oregon
C ONTENTS INTRODUCTION Accounting and Bookkeeping Careers in Accounting Advancement in Accounting Careers Moving up the Career Ladder Accounting as a Profession Public Accounting Private Accounting Not-for-Profit Accounting Accounting Concepts and Principles Organizations That Influence Accounting Practice American Institute of Certified Public Accountants Financial Accounting Standards Board Securities and Exchange Commission Internal Revenue Service Computers and Accounting Contents i i i ii ii ii iii iii iii iii iii iii CHAPTER 1 THE NATURE OF ACCOUNTING 1 Accounting Defined 2 Users of Accounting Information 2 Forms of Business Organization 2 Types of Business Operations 3 The Elements of Accounting 4 Assets 4 Liabilities 5 Owner s Equity 5 The Accounting Equation 5 Business Transactions and the Accounting Equation 6 The Dual Effect of Business Transactions 6 Recording the Effect of Transactions on the Accounting Equation 7 Summary of Transactions 11 Financial Statements 13 The Income Statement 13 The Statement of Owner s Equity 15 The Balance Sheet 15 Internet Assets 17 Joining the Pieces 18 Concepts and Skills Review 24 Case Problems 27 Challenge Problems 32 CHAPTER 2 RECORDING BUSINESS TRANSACTIONS 37 The Account 38 Debits and Credits 39 Recording Transactions in Asset, Liability, and Owner s Equity Accounts 40 Temporary Owner s Equity Accounts 42 Rules of Debit and Credit as Applied to Revenue and Expense Accounts 43 Recording Transactions in Revenue and Expense Accounts 43 Owner s Drawing Account 45 The Trial Balance 47 Normal Balance of Accounts 49 Summary of Debit and Credit Rules 50 Internet Assets 51 Joining the Pieces 52 Concepts and Skills Review 56 Case Problems 58 Challenge Problems 63 CHAPTER 3 STARTING THE ACCOUNTING CYCLE FOR A SERVICE BUSINESS 67 The Accounting Cycle 68 Step 1: Analyze Transactions from Source Documents 68 Step 2: Record Transactions in a Journal 68 Making Journal Entries 69 Compound Journal Entry 73 Advantages of Using a Journal 75 Step 3: Post from the Journal to the Ledger 75 The Chart of Accounts 75 The Four-Column Ledger Account Form 76 Posting Illustrated 77 Step 4: Prepare a Trial Balance of the Ledger 80 Summary of the First Four Steps in the Accounting Cycle 81 Locating and Correcting Errors 82 Types of Errors 82 Correcting an Error 82 Summary of Error Correction Procedures 84 Errors That Do Not Cause the Trial Balance to Be Out of Balance 85 Internet Assets 86 Joining the Pieces 87 Concepts and Skills Review 94 Case Problems 97 Challenge Problems 104 CHAPTER 4 THE ACCOUNTING CYCLE CONTINUED WORK SHEET, FINANCIAL STATEMENTS, AND ADJUSTING ENTRIES 109 Step 5: Determine Needed Adjustments 111 Supplies Used 112 Insurance Expired 112 Depreciation of Office Equipment and Office Furniture 113 Unpaid Salaries 115 The Matching Principle of Accounting 116 Step 6: Prepare a Work Sheet 117 Step 7: Prepare Financial Statements from a Completed Work Sheet 120 The Income Statement 120 The Statement of Owner s Equity 120 The Balance Sheet 122 Showing Additional Investments on the Statement of Owner s Equity 122 vii
Step 8: Journalize and Post Adjusting Entries 124 Internet Assets 125 Joining the Pieces 126 Concepts and Skills Review 131 Case Problems 135 Challenge Problems 140 CHAPTER 5 COMPLETING THE ACCOUNTING CYCLE FOR A SERVICE BUSINESS CLOSING ENTRIES AND THE POST-CLOSING TRIAL BALANCE 145 Purpose of Closing Entries 146 Step 9: Journalize and Post Closing Entries 146 Steps in the Closing Process 146 Journalizing Closing Entries 150 Diagram of the Closing Process 151 Posting Closing Entries 152 Step 10: Prepare a Post-Closing Trial Balance 156 Summary of the Steps in the Accounting Cycle 157 Fiscal Period 157 The Bases of Accounting 158 Internet Assets 159 Joining the Pieces 160 Concepts and Skills Review 164 Case Problems 167 Challenge Problems 174 COMPREHENSIVE REVIEW PROBLEM 1 FRED HAYES PHOTOGRAPHY STUDIO 177 CHAPTER 6 CASH AND THE COMBINED JOURNAL 179 Cash Defined 180 Control of Cash 180 The Combined Journal 181 Designing a Combined Journal 183 Recording Business Transactions in a Combined Journal 184 Proving the Combined Journal 186 Posting the Combined Journal 186 Accounting for Petty Cash 187 Establishing the Petty Cash Fund 190 Making Payments from the Petty Cash Fund 190 Petty Cash Payments Record 190 Replenishing the Petty Cash Fund 191 The Change Fund 193 Cash Short and Over 194 Bank Checking Accounts 195 Maintaining a Checking Account 196 Signature Card 196 Making Deposits 196 Endorsements 197 Writing Checks 197 The Bank Statement 198 Reconciling the Bank Statement 199 Updating Cash Records 202 A More Detailed Bank Reconciliation 202 Internet Assets 204 Joining the Pieces 205 Concepts and Skills Review 210 Case Problems 213 Challenge Problems 218 CHAPTER 7 ACCOUNTING FOR A MERCHANDISING BUSINESS PURCHASES AND CASH PAYMENTS 221 Merchandising Activity 222 Purchasing Procedures 222 Trade Discounts 225 Cash Discounts 225 Recording Purchases of Merchandise 226 The Purchases Account 226 Recording Purchases 227 The Purchases Journal 228 Recording Purchases in a Purchases Journal 229 The Accounts Payable Subsidiary Ledger 230 Posting the Purchases Journal 231 Posting to the Accounts Payable Ledger 232 Posting to the General Ledger 232 Merchandise Returns and Allowances 234 Purchases Returns and Allowances 234 Recording Purchases Returns and Allowances 235 Recording Cash Payments 236 The Purchases Discounts Account 236 Cash Payments Journal 237 Posting the Cash Payments Journal 238 Posting to the Accounts Payable Ledger 238 Posting Individual Entries in the General Dr. Column to the General Ledger 239 Posting Special Column Totals to the General Ledger 239 Proving the Accounts Payable Ledger 239 Freight Charges on Incoming Merchandise 243 Purchase Invoices as a Journal 244 Internet Assets 245 Joining the Pieces 246 Concepts and Skills Review 251 Case Problems 254 Challenge Problems 264 CHAPTER 8 ACCOUNTING FOR A MERCHANDISING BUSINESS SALES AND CASH RECEIPTS 267 Sales Activity 268 Terms of Payment 268 Procedures for Credit Sales 269 Procedures for Cash Sales 270 Recording Sales of Merchandise 271 Recording Sales in General Journal Form 272 Recording Sales in a Sales Journal 272 The Accounts Receivable Ledger 273 Posting from the Sales Journal 274 Posting to the Accounts Receivable Ledger 274 Posting to the General Ledger 274 Sales Returns and Allowances 275 Sales Discounts 277 Recording Cash Receipts 278 Cash Receipts Journal 279 Posting the Cash Receipts Journal 279 Schedule of Accounts Receivable 282 Accounting for Sales Taxes 283 Recording Sales Taxes Collected 284 Recording Sales Tax in a Sales Journal 284 Sales Returns Involving a Sales Tax 286 Credit Card Sales 287 Bank Credit Card Sales 287 Recording Bank Credit Card Sales 287 viii Paradigm College Accounting
Recording Private Company Credit Card Sales 287 Credit Cards Issued by Department Stores 288 Summary of Journals and Ledgers 288 Internet Assets 290 Joining the Pieces 291 Concepts and Skills Review 297 Case Problems 300 Challenge Problems 309 CHAPTER 9 WORK SHEET AND ADJUSTMENTS FOR A MERCHANDISING BUSINESS 317 Chart of Accounts for a Merchandising Business 318 Determining Needed Adjustments 318 Adjustment for Merchandise Inventory 321 Adjustment for Store Supplies Used 322 Adjustment for Office Supplies Used 323 Adjustment for Insurance Expired 323 Adjustment for Depreciation Expense 323 Adjustment for Salaries Owed but Unpaid 325 The End-of-Period Work Sheet 326 The Trial Balance and Adjustments Columns 326 The Adjusted Trial Balance Columns 326 Financial Statement Columns 328 Completing the Work Sheet 332 Internet Assets 333 Joining the Pieces 334 Concepts and Skills Review 337 Case Problems 340 Challenge Problems 345 CHAPTER 10 FINANCIAL STATEMENTS AND CLOSING ENTRIES FOR A MERCHANDISING BUSINESS 349 Preparing Financial Statements for a Merchandising Business 350 The Classified Income Statement 350 The Completed Income Statement 356 The Statement of Owner s Equity 356 The Classified Balance Sheet 358 Working Capital and the Current Ratio 359 Journalizing Adjusting Entries 361 Closing Entries for a Merchandising Business 361 The Post-Closing Trial Balance 367 Reversing Entries 367 Interim Statements 371 Internet Assets 372 Joining the Pieces 373 Concepts and Skills Review 380 Case Problems 383 Challenge Problems 389 COMPREHENSIVE REVIEW PROBLEM 2 MILLS SPORTING GOODS STORE 393 CHAPTER 11 ACCOUNTING FOR PAYROLL EMPLOYEE EARNINGS AND DEDUCTIONS 397 Importance of Payroll 398 Employer/Employee Relationships 398 How Employees Are Paid 399 Fair Labor Standards Act 399 Piece-Rate Plans 399 Calculating Gross Earnings 400 Payroll Deductions 401 Contents FICA Tax (Social Security) 401 The OASDI Taxable Wage Base 401 The FICA Tax Rates 401 Federal Income Tax 402 State and Local Income Taxes 403 Other Deductions 406 Calculating Net Earnings (Take-Home Pay) 406 Payroll Record Keeping 407 The Payroll Register 407 Employee s Earning Record 408 Payroll Systems 409 Manual Payroll System 409 Computerized Payroll System 409 Accounting Entry for Employee Earnings and Deductions 410 Salaries Expense 410 FICA Tax Payable OASDI and FICA Tax Payable HI 410 Federal Income Tax Payable 411 Other Amounts Withheld 411 Making Payment to Employees 412 Internet Assets 414 Joining the Pieces 415 Concepts and Skills Review 419 Case Problems 421 Challenge Problems 424 CHAPTER 12 ACCOUNTING FOR PAYROLL EMPLOYER TAXES AND REPORTS 427 Employer Identification Number 428 Employer Payroll Taxes 428 FICA Tax 429 Federal Unemployment Tax 429 State Unemployment Tax 429 Recording Employer s Payroll Taxes 430 FICA Tax Payable OASDI 431 FICA Tax Payable HI 432 FUTA Tax Payable 432 SUTA Tax Payable 432 Filing and Making Payroll Tax Payments 432 FICA and Federal Income Taxes 433 Federal Unemployment Taxes 436 State Unemployment Taxes 438 Form W-2: Wage and Tax Statement 438 Form W-3: Transmittal of Wage and Tax Statements 439 Paying Other Amounts Withheld 439 Workers Compensation Insurance 441 Internet Assets 443 Joining the Pieces 444 Concepts and Skills Review 449 Case Problems 451 Challenge Problems 454 COMPREHENSIVE REVIEW PROBLEM 3 CARLSON COMPANY 457 CHAPTER 13 ACCOUNTING FOR NOTES AND INTEREST 459 Promissory Notes 460 Determining the Due Date of a Note 461 Calculating Interest on a Note 463 Notes Payable and Interest Expense 464 Note Payable Issued for an Extension of Time 464 Payment of a Note at Maturity 465 ix
x Note Issued for Merchandise 465 Note Issued for a Loan of Cash 466 Discounting a Note Payable 466 Notes Receivable and Interest Income 467 Note Receivable Received for an Extension of Time 468 Collection of a Note at Maturity 469 Note Received for Merchandise 469 Note Received for a Loan of Cash 469 Discounting a Note Receivable 470 Contingent Liability on Discounted Notes 472 Accounting for Notes Not Paid on the Due Date 473 Note Renewed at Maturity 473 Dishonored Note 473 Collection of a Dishonored Note 474 Dishonored Discounted Note 474 Internet Assets 476 Joining the Pieces 477 Concepts and Skills Review 481 Case Problems 484 Challenge Problems 489 CHAPTER 14 ACCOUNTING FOR BAD DEBTS 493 The Direct Write-Off Method 494 The Allowance Method 497 The Income Statement Approach to Estimating Bad Debts 498 Recording the Write-Off of a Customer s Account Using the Allowance Method 500 The Balance Sheet Approach to Estimating Bad Debts 502 Adjusting Entry When the Allowance for Doubtful Accounts Account Has a Previous Balance 503 Recovery of Accounts under the Allowance Method 505 The Tax Reform Act of 1986 506 Internet Assets 506 Joining the Pieces 507 Concepts and Skills Review 511 Case Problems 513 Challenge Problems 520 CHAPTER 15 ACCOUNTING FOR MERCHANDISE INVENTORY 523 How Merchandise Inventory Affects the Income Statement 524 Types of Inventory Systems 527 Taking a Periodic Inventory 527 Goods in Transit 528 Goods on Consignment 528 Damaged or Obsolete Goods 528 Methods of Assigning Costs to Merchandise Inventory 529 Weighted-Average Method 531 Comparison of Inventory Costing Methods 531 Summary of Inventory Costing Methods 533 Lower of Cost or Market Rule 534 Estimating Inventories 535 The Gross Profit Method 535 The Retail Method 537 The Perpetual Inventory System 538 Recording Purchases 538 Recording Sales 539 Subsidiary Perpetual Inventory Records 540 Internet Assets 543 Joining the Pieces 544 Concepts and Skills Review 550 Case Problems 553 Challenge Problems 557 CHAPTER 16 ACCOUNTING FOR PLANT ASSETS AND DEPRECIATION 561 Purchasing Plant Assets 562 Determining the Cost of a Plant Asset 563 Land, Buildings, and Land Improvements 563 The Nature of Depreciation 564 Methods of Calculating Depreciation 565 The Straight-Line Method 565 The Units-of-Production Method 567 The Double Declining-Balance Method 568 Comparing the Three Methods 570 Plant Asset Records 571 Capital and Revenue Expenditures 572 Disposing of Plant Assets 573 Sale of Plant Assets 573 Trading in Plant Assets 576 Discarding Plant Assets 579 Intangible Assets 581 Natural Resources (Wasting Assets) 581 Internet Assets 582 Joining the Pieces 583 Concepts and Skills Review 589 Case Problems 592 Challenge Problems 595 CHAPTER 17 ACCOUNTING FOR ACCRUALS AND DEFERRALS 599 Accrued Expenses 600 Accrued Salaries Expense 601 Accrued Interest Expense 605 Other Accrued Expenses 608 Accrued Revenue 608 Summary of Accruals 612 Deferred Expenses 612 Deferred Expenses Recorded as Assets 612 Deferred Expenses Recorded as Expenses 614 Comparison of Methods for Recording Deferred Expenses 616 Deferred Revenue 616 Deferred Revenue Recorded as a Liability 618 Deferred Revenue Recorded as Revenue 619 Comparison of Methods for Recording Deferred Revenue 620 Summary of Deferrals 622 Summary of Reversing Entries 622 Internet Assets 623 Joining the Pieces 624 Concepts and Skills Review 628 Case Problems 630 Challenge Problems 633 COMPREHENSIVE REVIEW PROBLEM 4 WENDOVER FASHIONS 637 CHAPTER 18 ACCOUNTING FOR PARTNERSHIPS 639 Characteristics of a Partnership 640 Advantages of a Partnership 640 Disadvantages of a Partnership 641 Articles of Partnership 641 Accounting for a Partnership 641 Recording Beginning Investments of Partners 642 Recording Partner Withdrawals 643 Paradigm College Accounting
Division of Net Income or Net Loss in a Partnership 644 Income Division Based on a Fractional Share to Each Partner 644 Income Division Based on the Ratio of Capital Invested 645 Income Division Based on Salary Allowances to Partners 646 Income Division Based on Interest Allowances to Partners 646 Income Division Based on Salary and Interest Allowances to Partners 647 Closing Entries for a Partnership 649 Financial Statements for a Partnership 651 Admission of a New Partner 652 Admission of a New Partner by an Investment of Assets 652 Admission of a New Partner by the Purchase of an Interest 655 Withdrawal of a Partner 655 Liquidation of a Partnership 656 Liquidation with Realization at a Gain 657 Liquidation with Realization at a Loss 659 Internet Assets 661 Joining the Pieces 662 Concepts and Skills Review 667 Case Problems 670 Challenge Problems 674 APPENDIX A THE VOUCHER SYSTEM 679 Components of a Voucher System 679 Using the Registers 680 End-of-Month Procedures 681 APPENDIX B OTHER DEPRECIATION METHODS SUM-OF-THE-YEARS -DIGITS METHOD AND ACCELERATED COST RECOVERY SYSTEMS 682 Sum-of-the-Years -Digits Method 682 Sum-of-the-Years -Digits Method for Less Than a Year 683 Accelerated Cost Recovery Systems 683 ACRS 1981 1986 684 ACRS after the Tax Reform Act of 1986 685 ACRS after the Tax Reform Act of 1989 686 GLOSSARY 687 INDEX 705 Contents xi