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Principles of FINANCIAL ACCOUNTING

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Principles of FINANCIAL ACCOUNTING Principles of FINANCIAL ACCOUNTING Christine Jonick, Ed.D. Principles of FINANCIAL ACCOUNTING Christine Jonick, Ed.D. Blue Ridge | Cumming | Dahlonega | Gainesville | Oconee Principles of Financial Accounting is licensed under a Creative Commons Attribution- ShareAlike 4.0 International License. This license allows you to remix, tweak, and build upon this work, even commercially, as long as you credit this original source for the creation and license the new creation under identical terms. If you reuse this content elsewhere, in order to comply with the attribution requirements of the license please attribute the original source to the University System of Georgia. NOTE: The above copyright license which University System of Georgia uses for their original content does not extend to or include content which was accessed and incorporated, and which is licensed under various other CC Licenses, such as ND licenses. Nor does it extend to or include any Special Permissions which were granted to us by the rightsholders for our use of their content. Image Disclaimer: All images and figures in this book are believed to be (after a reasonable investigation) either public domain or carry a compatible Creative Commons license. If you are the copyright owner of images in this book and you have not authorized the use of your work under these terms, please contact the University of North Georgia Press at ungpress@ ung.edu to have the content removed. Published by: University of North Georgia Press Dahlonega, Georgia Cover Design and Layout Design: Corey Parson Cover Image: Scott Rodgerson, CC0 ISBN: 978-1-940771-15-1 Printed in the United States of America, 2017 For more information, please visit: http://ung.edu/university-press Or email: [email protected] If you need this document in another format, please email the University of North Georgia Press at [email protected] or call 706-864-1556. TABLE OF C ONTENTS CHAPTER 1: ACCOUNTING CYCLE FOR THE SERVICE BUSINESS—CASH BASIS 1 1.1 Introducing Accounts and Balances . 1 1.2 Net Income—A Critical Amount........................... 3 1.3 The Mechanics of the Accounting Process .................. 3 1.3.1 The Journal ..............................................................3 1.3.2 Rules of Debit and Credit ...................................................4 1.3.3 Journalizing Transactions ..................................................4 1.3.4 Ledger...................................................................6 1.3.5 Posting ..................................................................7 1.3.6 Normal Balance...........................................................9 1.3.7 Trial Balance ............................................................12 1.4 Financial Statements .................................. 13 1.4.1 Income Statement ........................................................13 1.4.2 The Accounting Cycle .....................................................14 1.4.3 Temporary Accounts......................................................15 1.4.4 Closing Entries ..........................................................15 1.4.5 Revenue Transactions on Account ......................................... 20 1.4.6 Expense Transactions on Account ......................................... 22 1.5 Asset, Liability and Stockholders’ Equity Accounts ......... 25 1.5.1 Assets ..................................................................25 1.5.2 Liabilities .............................................................. 26 1.5.3 Stockholders’ Equity ......................................................27 1.5.4 Balance Sheet Account Transactions ....................................... 28 1.6 Account Wrap-Up ..................................... 31 1.7 The Accounting Equation . 32 1.7.1 Accounting Equation Broken Out .......................................... 34 1.7.2 Accounting Transaction Grid.............................................. 34 1.7.3 Retained Earnings Statement ..............................................35 1.7.4 Balance Sheet........................................................... 36 1.8 Changes in Stockholders’ Equity.........................38 1.9 Wrap up ............................................. 43 CHAPTER 2: ACCOUNTING CYCLE FOR THE SERVICE BUSINESS—ACCRUAL BASIS 44 2.1 Accrual Basis of Accounting.............................44 2.2 Matching Principle ....................................44 2.2.1 Adjusting Entries ....................................................... 46 2.2.2 Complete Accounting Cycle............................................... 46 2.2.3 Adjusting Entry Accounts .................................................47 2.3 Adjusting Entries......................................49 2.3.1 Adjusting Entries—Deferrals .............................................. 49 2.4 Adjusting Entries—Deferrals............................66 2.4.1 Deferred Revenue . 66 2.4.2 Summary of Revenues ................................................... 70 2.4.3 Adjusting Entries ........................................................71 2.5 Adjusting Entries—Accruals .............................71 2.5.1 Accrued Expenses . 71 2.5.2 Accrued Revenue ........................................................77 CHAPTER 3: ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS 83 3.1 Introduction ..........................................83 3.2 Merchandising Income Statement ....................... 85 3.3 Basic Merchandising Transactions (perpetual inventory system)............................86 3.3.1 Merchandising Transactions (perpetual inventory system) with Discounts – The Buyer .............................................................. 88 3.3.2 Merchandising Transactions (perpetual inventory system) with Discounts – The Seller............................................................... 89 3.4 Transportation Costs for Merchandising Transactions ..... 91 3.5 Basic Merchandising Transactions (periodic inventory system) .............................96 3.5.1 Inventory Shrinkage ..................................................... 99 3.6 Closing Entries for Merchandising Accounts ..............99 CHAPTER 4: ASSETS IN MORE DETAIL 104 4.1 Inventory ........................................... 104 4.1.1 Perpetual Inventory System ...............................................105 4.1.2 Periodic Inventory System................................................110 4.1.3 Lower-of-Cost-or-Market Inventory Valuation...............................113 4.1.4 Physical Inventory Count.................................................115 4.2 Cash.................................................118 4.2.1 Bank Reconciliation .....................................................119 4.2.2 Bank Card Expense .....................................................123 4.3 Note Receivable ...................................... 124 4.3.1 Issue Date..............................................................124 4.3.2 Maturity (Due) Date.....................................................125 4.4 Uncollectible Accounts................................ 128 4.4.1 Direct Write-off Method..................................................129 4.4.2 Allowance Method ......................................................130 4.5 Fixed and Intangible Assets............................ 139 4.5.1 Depreciation Terms .....................................................140 4.5.2 Depreciation Methods ...................................................143 4.6 Summary ........................................... 150 4.7 Gains and Losses on Disposal of Assets .................. 150 4.7.1 Disposal of Fixed Assets ..................................................151 4.8 Gains and losses on the income statement ............... 163 4.8.1 Amortization of an Intangible Asset ........................................164 4.9 Investments ......................................... 170 4.9.1 Investments Overview ...................................................170 4.9.2 Investments in Stock ....................................................172 4.9.3 Investments in Stock on the Financial Statements............................179 4.10 Investments in Bonds ................................180 4.10.1 Held-to-Maturity Securities .............................................181 4.10.2 Purchasing Bond Investments with Accrued Interest and Partial-Year Amortization....186 4.10.3 Selling Bond Investments with Accrued Interest and Partial-Year Amortization 188 4.10.4 Trading Securities .....................................................190 CHAPTER 5: LIABILITIES IN MORE DETAIL 200 5.1 Sales Tax ............................................200 5.2 Payroll.............................................. 201 5.3 Notes Payable........................................205 5.3.1 Short-Term Note Payable................................................ 205 5.3.2 Long-Term Note Payable................................................208 5.4 Bonds . .211 5.4.1 Bond Transactions When Contract Rate Equals Market Rate...................213 5.4.2 Bond Transactions When Contract Rate is Less Than Market Rate..............215 5.4.3 Carrying Amount of Bonds Issued at a Discount .............................219 5.4.4 Bond Transactions When Contract Rate is More Than Market Rate ............ 220 5.4.5 Carrying Amount of Bonds Issued at a Premium ............................ 223 5.4.6 Calling Bonds ......................................................... 224 5.4.7 Partial Years .......................................................... 227 5.4.8 Partial Redemptions...................................................
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