Module 1 Lecture LEARNING OBJECTIVES At the completion of this week, you should meet the following objectives

:
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Describe the nature of a business and the role of ethics and accounting in business Summarize the development of accounting principles and their application to practice State the accounting equation and define each element of the equation Describe how business transactions can be recorded and how it effects the elements of the accounting equation Describe the financial statements of a proprietorship and explain how they interrelate

ASSIGNMENTS TO DO THIS WEEK
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Familiarize Yourself with the eLearning System Review the Course Syllabus Read Student Rights & Responsibilities Review the eLearning Student Help Guide

READ:

Chapter 1

ASSIGNMENTS:

ASSIGNMENT #1 - Turn to page 44 in your text and complete Problem PR 015B: ◦ Download Assignment # 1's Excel file from the Assignments Tool. ◦ Follow the instructions in the problem and in the file; then, ◦ Submit the completed file as an attachment using the Assignments Tool. Please do not email any assignments – always submit them via the Assignments Tool. Don’t forget to save a backup copy of your work.

Introduction to Accounting & Business Welcome to BUMT 3300A Financial Accounting!

Accounting should not be intimidating – it is a set of rules and standards to follow when organizing financial transactions. It is a universal language that individuals in business understand and use – accounting is the language of business. It is important to know the fundamentals of accounting as a business owner, investor, lender, and employee and to understand the financial picture in order to make informed decisions as a manager. When interested parties are researching your organization, they are only concerned with one thing – the numbers. Interested parties include: 1. 2. 3. 4. 5. 6. 7. 8. Owner Investors/Stockholders Bankers Governmental Agencies (i.e., IRS) Managers Employees Customers Competitors

Types of Businesses The focus of week 1 is to introduce you to different types of businesses: sole proprietorship, partnerships, and corporations and to introduce the basic fundamentals of accounting – the accounting equation. Sole Proprietorship
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Individual, or small businesses Single owner with personal liability

Partnership:
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More than one owner Each owner is a partner with personal liability

Corporation
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Owned by stockholders with limited liability Formed under state law Separation of ownership and management

Accounting/Financial Terms

Financial Transactions Financial transactions are analyzed and belong to one of the three categories (Assets, Liabilities or Owner’s Equity). A financial transaction is any event that affects the financial position.

Assets Economic resources expected to benefit company in the future
       

Cash Accounts Receivable Notes Receivable Inventory Land Building Equipment, furniture & fixtures Prepaid Expenses (Liabilities paid in advance)

Liabilities Amount owed to creditors
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Accounts Payable Notes Payable Taxes Payable Salaries Payable Prepaid Revenue (Revenue paid, but not yet earned)

Owner's (Stockholder's) Equity Claims held by owners, divided into two main categories:

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Contributed/Paid in Capital Retained Earnings a. Expenses – decreases in retained earnings resulting from costs of operations) b. Income – increases in retained earnings resulting from operating revenues) c. Dividends – Distribution of assets to shareholders (decreases retained earnings)

The Accounting Equation Resources owned by a business are its assets. The debts of a business are its liabilities. The rights of the business owners are called the owner’s equity. The relationships among assets, liabilities and owner’s equity are expressed in the following equation:

ASSETS = LIABILITIES + OWNER’S EQUITY This is called the accounting equation. Given any two amounts, the accounting equation may be solved for the third, unknown amount. To illustrate, if the assets owned by a business amount to $100,000 and the liabilities are $30,000, the owner’s equity is $70,000 as shown: Assets – Liabilities = Owner’s Equity $100,000 -$30,000 = $70,000 Financial Statements Income Statement The income statement reports the revenues and expenses for a period of time based on the matching concept (matches the expenses with the revenue generated by those expenses). The excess of revenue over expenses is called net income or net profit. If expenses exceed revenue, the excess is a net loss. Statement of Owner’s Equity The statement of owner’s equity reports the changes in the owner’s equity for a period of time. It is prepared after the income statement because the net income or net loss for the period must be reported in this statement. It is prepared before the balance sheet, since the amount of owners equity at the end of the period must be reported on the balance sheet. The statement of owner’s equity is viewed as a connecting link between the income statement and the balance sheet. Balance Sheet The balance sheet represents this accounting equation and presents a financial snapshot of the organization at a point in time. In the account format, the balance sheet shows the assets on the left side and the liabilities and owner’s equity on the right side – just like the accounting equation. In the report format, the balance sheet presents the liabilities and owner’s equity sections below the assets section.

Statement of Cash Flows The statement of cash flows consists of three sections: 1) operating activities, 2) investing activities, and 3) financing activities. It reports the cash receipts and cash payments from each of the three sections Additional Readings: www.dwmbeancounter.com/tutorial/DrCRTChart.html http://www.ais-cpa.com http://www.imanet.org http://theiia.org

End of Module 1 Lecture

Module 2 Lecture LEARNING OBJECTIVES At the completion of this week, you should meet the following objectives:
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Define BUSINESS TRANSACTIONS Examine ACCOUNTS used to analyze, organize, classify and record TRANSACTIONS Understand the CHART OF ACCOUNTS and its links to FINANCIAL STATEMENTS Study the DOUBLE-ENTRY SYSTEM and the rules for posting TRANSACTIONS to ACCOUNTS Practice analyzing BUSINESS TRANSACTIONS by their impact on the ACCOUNTING EQUATION Learn the role of the TRIAL BALANCE

READ

Chapter 2

ASSIGNMENTS TO DO THIS WEEK

Example Exercises ◦ 2-1 (Page 56) ◦ 2-2 (Page 61) ◦ 2-3 (Page 65) ◦ 2-4 and 2-5 (Page 68) ◦ 2-6 (Page 70) ◦ 2-7 (Page 71)

Practice Exercises (Pages 82 – 83) ◦ PE 2-1A ◦ PE 2-2A ◦ PE 2-3A ◦ PE 2-4A ◦ PE 2-5A ◦ PE 2-6A ◦ PE 2-7A

ASSIGNMENT #2: Complete and submit PR 2-2A (Page 91) via the Assignment tool. Analyzing Transactions Using Accounts To Record Transactions Accounting is a system of classifying, recording and summarizing transactions. A transaction is created by an exchange or an agreement to an exchange. The first requirement of a transaction is

that it must be an exchange affecting the separate and identifiable business entity for which it is being recorded. An event that has no effect does not need to be recorded. For example, a discussion regarding a potential sale is only a discussion. When a commitment is made, for example to buy (or sell), a significant event has occurred and a transaction has taken place. An economic event or condition that directly changes an entity’s financial condition or its results of operations is a business transaction. (Warren, p. 10) Once a transaction occurs, a sequence of activities is launched to classify, record and summarize that transaction so that it may be properly included in the entity’s financial statements. A transaction is classified by recording it in its own particular account. Accounts are created, as needed by the business entity, to capture transactions in each of the major categories included in the accounting equation; Assets, Liabilities, and Owners Equity. Note that the owners equity account must be expanded to include categories for recording revenues (increases in owners equity) and expenses (decreases in owners equity). This gives rise to the chart of accounts. The Chart Of Accounts Accounts may be created according to the needs of a particular business entity, however, standard convention provides a numbering scheme with asset accounts prefixed with the number one, liabilities number two, owners equity number three, revenue accounts with the number four, and expenses with the number five. See the inside back cover to your text for a listing of account classifications. This scheme results in a chart of accounts as shown in the following sample: SAMPLE CHART OF ACCOUNTS

Balance Sheet Accounts 1. Assets: 11. Cash 12. Accounts Receivable 14. Supplies 15. Prepaid Insurance 17. Land 18. Office Equipment 2. Liabilities 21. Accounts Payable

Income Statement Accounts 4. Revenue: 41. Fees Earned 5. Expenses 51. Wages Expense 52. Rent 54. Utilities 55. Supplies 59. Miscellaneous Expense

23. Unearned Rent 3. Owner’s Equity 31. Chris Clark, Capital 32. Chris Clark. Drawing

Other special categories, such as memo accounts, are sometimes included in the chart of accounts prefixed with the numbers six, seven, eight, or nine. Double-Entry Accounting And The Accounting Equation Debits and Credits In its simplest form, an account has 3 parts (Warren, p. 50); a title, a space for debit entries and a space for credit entries. A debit is an entry on the left side of the account and a credit is an entry on the right side of an account. This simple format is represented graphically as a “T” Account as shown here: Cash (11) Left Side (Debit) Right Side (Credit) Note that the balance of an account is the difference between the sum of the debits and the sum of the credits: that is, add up all of the debits (left side entries); then add up all of the credits (right side entries), including beginning balances (if any), and subtract one total from the other.

If the account is a debit account (an asset or expense account), it will normally have a debit balance. To get the balance, subtract the total Balance credits from the total debits. The resulting number is placed on the left-hand side of the balance line and will normally be positive. Note that this is another way of saying that debit entries will increase the balance in these accounts, while credits will decrease the balance. If the account is a credit account (a liability, owner’s equity or revenue account), it will normally have a credit balance. In this case, to get the balance, subtract the total debits from the total credits. The resulting number is placed on the right-hand side of the balance line and will normally be positive. This is another way of saying that credit entries will increase the balance in these accounts, while debits will decrease the balance. (One major exception to the normal balance rule is the expense account category. Since expenses decrease owner’s equity, the major category to which they belong, these accounts will normally carry a debit balance.) For a review of the details, see Exhibit 3 (Warren, p. 55), which is reproduced here:

Double-Entry Accounting And The Accounting Equation (cont')

In its complete format, an account also contains spaces for consecutive postings and for descriptions of the entries. Although computerized accounting systems may produce account summaries in many formats, the typical components are represented in the ledger page (Warren, p. 67), partially reproduced here:

Recording Transactions After transactions are analyzed to determine the proper account and details for recording them, they are normally posted to a journal. There are many types of journals with a commonly used format for starters being the General Journal. The journal is a chronological record of transactions, which are subsequently posted to their respective ledger accounts (Warren, pp. 55-

57).

Posting Double-Entry Accounts – Journal Entries The double-entry accounting system requires that every business transaction be recorded in at least two accounts. In addition , the total debits and credits in each transaction must be equal. This process is called journalizing. The rules for debiting and crediting accounts are initially applied to entries in the journal. An example of analyzing a transaction and posting the transaction in a journal entry is the following sample transaction in which the proprietor (owner) of a business (NetSolutions) invests in the business (contributes initial operating capital) by depositing $25,000 in the company’s bank account. An analysis of this transaction discloses that the two major accounts being changed by this transaction are account #11 -Cash, and the owner investment account, # 31 Chris Clark, Capital. Since the cash account is under Assets, its balance is increased by a debit entry. Capital is under Owner’s Equity and it’s balance is increased by a credit entry. The entry to record this transaction is (Warren, p. 55):

Posting From The Journal To The Ledger Accounts

As shown above, transactions are first recorded in a journal. Periodically, they are posted to their respective ledger accounts. Note that under this process, the entries to individual ledger accounts are not balanced (debits do not equal credits), however; when taken as a whole, the entries are still in balance. This process is covered in detail under the heading Posting Journal Entries to Accounts (Warren, pp. 59 -66). The resulting ledger balances for NetSolutions are shown in Exhibit 5 (Warren, pp. 67 - 68). Study the process and practice it by completing Example Exercises 2-3 and 2-4. Note that the Example Exercises also refer to Practice Exercises that will illustrate the process. Solutions to the Practical Exercises are available as downloads to check your answers. The Trial Balance A trial balance is a listing of all the accounts in the chart of accounts along with their balances, usually in numerical order. Since the double-entry accounting system requires that debits equal credits in every journal entry, total debits will equal total credits when the two columns are totaled in the trial balance listing. If the trial balance totals are not equal, a posting or calculating error may be responsible. Note that even when the totals are equal, errors may have been made. For details on these two types of errors, see Errors Affecting the Trial Balance (Warren, pp. 68 69), and Errors Not Affecting the Trial Balance (Warren, p. 70). Also, see Example Exercises 26 and 2-7 with their corresponding Practice Exercises for clarification. End of Module 2 Lecture

Module 3 Lecture LEARNING OBJECTIVES (repeat from module 2) At the completion of this week, you should meet the following objectives:
 

Posting Journal Entries to Accounts Preparing the Trial Balance

READ

Re-Read Chapter 2

ASSIGNMENTS TO DO THIS WEEK

Review Example Exercises ◦ 2-2 (Page 61) ◦ 2-3 (Page 65) ◦ 2-4 and 2-5 (Page 68) ◦ 2-6 (Page 70) ◦ 2-7 (Page 71) Practice Exercises (Pages 82 – 83) ◦ PE 2-1A ◦ PE 2-2A ◦ PE 2-3A ◦ PE 2-4A ◦ PE 2-5A ◦ PE 2-6A ◦ PE 2-7A

ASSIGNMENT #3: Complete and submit PR 02-3A (Page 91) via the Assignment tool. Analyzing Transactions (Cont' from Module 2) Welcome back! This week we will finish up our lecture on analyzing transactions. We will build on the using the combination of the expanded accounting equation and T-Accounts in order to post journal entries to the representative accounts and creating a trial balance. This week we will really focus on analyzing financial transactions and translating them into debits and credits which organizes the financial data into a standardized system. When posting a financial transaction, two accounts must always be effected – this is known as double-entry bookkeeping. The sum of all of the debits and the sum of all of the credits must always balance.

Financial transactions are treated differently depending on the side of the accounting equation that the account belongs to. When using the debit and credit rules the following steps should be considered: 1. Determine which accounts the financial transaction effects – asset, liability, revenue, expense or capital account 2. Determine if the financial transaction will increase or decrease the account’s balance 3. Apply the debit and credit rules based on the type of account and whether the balance of the account will increase or decrease Accounts that normally will have a debit balance (a balance on the left side of the T-Account) which are increased with a debit and decreased with a credit are:
  

Assets Expenses Owner’s withdrawals

Analyzing Transactions (Cont' from Module 2) Accounts that normally will have a credit balance (a balance on the right side of the T-Account) which are increased with a credit and decreased with a debit are: 1. Liabilities 2. Revenues 3. Owner’s contributions So in essence, the following accounts will have the effective debit and credit rules:

These rules are designed to keep the accounting equation in balance. Analyzing Transactions (Cont') Let’s go through some examples of business transactions in terms of debits and credits:

Increase an asset and increase a liability a. Purchase land (asset) on credit/note payable (liability) Debit land $100,000 (increase liability) Credit note payable $100,000 (increase liability)

Increase one asset and decrease another asset b. Purchase land (asset) with cash (asset) Debit land $45,000 (increase asset) Credit cash $45,000(decrease cash)

Decrease an asset and decrease owner’s equity c. Pay utilities expense (expense/owner’s equity with cash (asset) Debit utilities expense $1,000 (decrease owner’s equity) Credit cash $1,000 (decrease asset)

Decrease an asset and decrease a liability d. Make a cash (asset) payment on note payable (liability) Debit note payable $500 (decrease asset) Credit cash $500 (decrease asset)

Increase an asset and increase owner’s equity e. Receive paid-in capital (owner’s equity) to open cash account (asset) Debit cash $50,000 (increase asset)

Analyzing Transactions (Cont') Represented in T-Account format, the ledger posting of the preceding entries is:

So if we summarize all of our T-Accounts, we will have the following balances:

The summary of all of the debits and credits are organized into a worksheet called the trial balance. This is the first step in the organization of business transactions to let the bookkeeper know that all of the debit and credits are in balance. If it is not in balance, every transaction must be reviewed carefully to ensure that all financial transactions have been properly posted.

Module 4 Lecture LEARNING OBJECTIVES • Nature of ADJUSTING PROCESS • Recording ADJUSTING ENTRIES • Summary of ADJUSTMENTS • ADJUSTED TRIAL BALANCE READ • Chapter 3 ASSIGNMENTS TO DO THIS WEEK • Example Exercises
 ◦ 3-1 (Page 105) ◦ 3-2 (Page 109) ◦ 3-3 (Page 112) ◦ 3-4 (Page 113)
 ◦ 3-5 (Page 114) ◦ 3-6 (Page 116) ◦ 3-7 (Page 119) • • Practice Exercises (Pages 131 – 132)
 ◦ PE 3-1A ◦ PE 3-2A ◦ PE 3-3A◦ ◦ PE 3-4A
 ◦ PE 3-5A ◦ PE 3-6A ◦ PE 3-7A

ASSIGNMENT #4: 
 
 Complete and submit PR 03-5A (Page 140) via the Assignment tool. Recap of the Accounting Cycle Covered in the Last Three Units 1. Analyze transactions and record in the journal 2. Post the transactions to the appropriate ledgers 3. Prepare an unadjusted trial balance 4. Prepare an optional end-of-period spreadsheet (work sheet) The Adjusting Process (cont')

This leads us to the next step in the accounting cycle – the adjusting process! In accrual accounting, there are transactions that must be accounted for in order to properly match up the organization’s financial activities with the proper date. There are generally five type of adjusting entries as follows: 1. Prepaid expenses 2. Unearned revenue 3. Accrued revenue 4. Accrued expense

5. Depreciation expense Prepaid expenses fall under Assets for the original transaction. This is a deferred expense. For example, if you prepay your insurance for one year in advance you will make the following entry:

Then, at the end of the accounting period, the following journal entry makes the appropriate adjustment for expensing the portion of the insurance that has expired. If it is a twelve-month policy, you will need to EXPENSE the insurance for the appropriate month as follows:

Unearned revenue falls under liabilities for the original transaction. This is a deferred revenue. For example, if you receive a prepayment for services that you have not yet rendered, you will make the following entry:

This often occurs in industries such as construction when there are deposits made and progress billing is agreed between the company and the client. So at the end of the given period, if 50% of the job is completed or services are rendered, then the following adjusting entry will be made:

Accrued revenues and expenses allow the company to match services rendered and bills unpaid

with the correct month. The following represents an example:

The last type of adjusting entry involves depreciation. Depreciation is a manual entry allowed by organizations to show allowable depreciation for their fixed assets on their books. There is a manual that has been created along GAAP which dictates the average useful life of fixed assets. Once this is determined, then the organization must decide what type of depreciation the organization wishes to use. There are several acceptable types of depreciation, however, the organization must remain consistent once it decides the type. The following is an example of a typical depreciation adjusting entry:

3 Once you have made your adjusting entries in your general journal or your worksheet, then you will have to create an “adjusted trial balance” to ensure that all of your debits and credits are in balance.

Works Cited Warren, Carl S., Reeve, James M., and Duchac, Jonathan E. Financial Accounting 11e. Mason, OH: South-Western Cengage Learning, 2009. End of Module 4 Lecture

Module 5 Lecture LEARNING OBJECTIVES • Flow of Accounting Information • Prepare Financial Statements • Prepare Closing Entries • Describe the Accounting Cycle READ • Chapter 4 Completing the Accounting Cycle We are now at our halfway point through our accounting course – isn’t it exciting! This unit will focus on completing the accounting cycle. We will take all of the steps we have learned in the accounting cycle and create financial statements. Let’s recap what we have learned in the accounting cycle over the last four units: • • • • • • Analyze transactions and record in the journal Post the transactions to the appropriate ledgers Prepare an unadjusted trial balance Prepare an optional end-of-period spreadsheet (work sheet) Journalize and post adjusting entries Prepare an adjusted trial balance

This process is illustrated in your text on pages 157 to 165. The 10 steps in the Accounting Cycle are graphically outlined in Exhibit 8 on page 157 (duplicated here for your convenience):

Once through the process of posting and journalizing entries, we are ready to work on financial statements. Financial statements include the Income Statement, Statement of Owner’s Equity, and the Balance Sheet. First prepare the income statement to demonstrate the profitability of the company. In using the worksheet, it helps to pull together the proper information to create the financial statements. Review the worksheet:

Note how each financial statement is dependent upon the other. In order to create the Income Statement, you need the information from your worksheet. In order to create the Statement of Owner’s Equity, you need the net income from your Income Statement. Finally, in order to complete your balance sheet, you need the revised capital amount from your Statement of Owner’s Equity. Works Cited Warren, Carl S., Reeve, James M., and Duchac, Jonathan E. Financial Accounting 11e. Mason, OH: South-Western Cengage Learning, 2009. End of Module 5 Lecture

Module 6 Lecture Last week’s module provided an overview of the accounting cycle with a focus on steps 1 through 8; from analyzing and journalizing transactions through preparation of financial statements. This week reviews those first 8 steps in more detail and adds emphasis on closing the books, steps 9 (journalizing and posting closing entries), and step 10 (preparing the post-closing trial balance. LEARNING OBJECTIVES (repeat from module 5) • Flow of Accounting Information • Prepare Financial Statements • Prepare Closing Entries • Describe the Accounting Cycle READ • Re-read Chapter 4 (Pages 143 – 169) Completing the Accounting Cycle (cont' from Module 5) Last week’s module provided an overview of the accounting cycle with a focus on steps 1 through 8; from analyzing and journalizing transactions through preparation of financial statements. This week reviews those first 8 steps in more detail and adds emphasis on closing the books, steps 9 (journalizing and posting closing entries), and step 10 (preparing the post-closing trial balance to reset account balances for the next accounting cycle (Warren, p. 156). Once we have finished with the current accounting period, we need to “close the period.” This means that the all of the temporary accounts need to be closed and transferred to the permanent accounts. The permanent accounts are the accounts listed in the basic accounting equation from Unit 1 – Assets, Liabilities and Equity. All other accounts will be “cleared.” The following closing entries need to be made after preparing the financial statements in order to complete the entire accounting cycle: • Transfer revenue account balances to Income Summary • • Transfer expense account balances to Income Summary • • Transfer Income Summary to Capital • • Transfer drawing (withdrawals) balance to Capital Using the example from last week, let’s “close our books” for this period. Again I am attaching the worksheet as follows:

The following journal entries will close the temporary revenue and expense accounts and transfer the net income to the Capital account and deduct the applicable withdrawals as follows:

Now, by closing the temporary accounts, the Capital account matches the ending Capital amount in the Statement of Owner’s Equity. Then, the post closing trial balance is created which is the same as the trial balance but it only includes the permanent balance sheet accounts as follows: Works Cited Warren, Carl S., Reeve, James M., and Duchac, Jonathan E. Financial Accounting 11e. Mason, OH: South-Western Cengage Learning, 2009. End of Module 6 Lecture

Module 7 Lecture LEARNING OBJECTIVES • Basic Accounting Systems • Manual Accounting Systems • Computerized Accounting Systems • E-Commerce READ • Chapter 5 • Chapter 5 Summary (PDF) Accounting Systems This week we will discuss the different types of accounting systems. Most companies rely on computers which will be covered in this unit. This week we will focus on: Now that we have completed the accounting cycle, let’s talk about some special considerations in accounting. It is very rare that an organization will still use a manual system. However, it is important to understand the fundamentals of a manual accounting system so that way you understand how the computerized version works. All accounting systems are meant to create a system of organization of gathering and tracking financial data as well as creating internal and external reports in order to make informed business decisions. Internal controls and safeguards need to be implemented in order to ensure the validity and protection of an organization’s finances. There are some organizations that use a combination of subsidiary ledgers along with the general ledger. These subsidiary ledgers tie in with the general ledger, but give more detailed information about a specific account. There is the accounts receivable subsidiary ledger, accounts payable subsidiary ledger, revenue (sales) journal, cash receipts journal, purchases journal, cash payments journal, as well as other descriptive journals as an organization will develop and use. Purchases Journal The Purchases Journal is a special journal that is used to track all purchases of the organization. Purchases Journal Date Account Terms Inv Post Cr. Accounts Dr. Other Credited # Ref Payable Accounts

You would record the date, the applicable account to be credited, terms if your creditors offer discounts, the invoice number, the post reference to identify that it has been posted to the general ledger, the accounts payable and other accounts that are affected. These amounts are totaled at the end of the reporting period and transferred to the general ledger. Accounts Payable Subsidiary Ledger From the Purchases Journal, the Accounts Payable Subsidiary Ledger can be created. This is done by taking categorizing each vendor and tallying a running balance. This should be done on

a daily basis to keep track of payables. At the end of the month, the sum of the accounts payable subsidiary ledger will equal the ending balance in accounts payable on the balance sheet. Revenue Journal The Revenue Journal is a special journal that is used to track all the revenues of an organization. Revenue Journal Date Account Terms Inv Post Dr. Acct Rec Cr. Dr. Acct Rec
 Cr. Sales # Ref Fees Earned Tax Payable

You would record the date, the applicable account names, terms if you offer discounts, the invoice number, the post reference to identify that it has been posted to the general ledger, the accounts receivable and revenue accounts, and sales tax liability (if applicable). The last two columns are totaled at the end of the reporting period and transferred to the general ledger. Accounts Receivable Subsidiary Ledger From the Revenue Journal, the Accounts Receivable Subsidiary Ledger can be created. This is done by taking categorizing each customer and tallying a running balance. This should be done on a daily basis to keep track of aging receivables. At the end of the month, the sum of the accounts receivable subsidiary ledger will equal the ending balance in accounts receivable on the balance sheet. Cash Receipts Journal Cash Receipts Journal Cash Dr. Sales Discount Dr. Accounts Receivable Cr. Sales Cr. Account Name Other Post Ref Account Cr.

Date

You would record the date, the cash amount of the check, the Sales Discount (if applicable), the entire amount of the accounts receivable (if sales on account) or the sales amount (if cash sales), and the other column indicates any other cash receipt along with the corresponding credit entry. All cash receipt transactions will be included on this Special Journal. Cash Payments Journal Lets review an example of the Cash Payments Journal as follows: Cash Payments Journal Date Check Account Post Other Accounts Purchases Cash # Debited Ref Accounts Payable Dr. Discounts Cr. Cr. Dr.

You would record the date, the issued check number, the name of the Account Debited, the post reference to identify that it has been posted to the subsidiary ledgers or general ledger, the sundry column which indicates any other cash payment which will be posted to the post ref account number (not totaled), accounts payable to be debited less any purchase discounts and the actual

cash payment in the final column. All cash payments are recorded to this Special Ledger. The last three columns are totaled at the end of the reporting period and transferred to the general ledger. Click here to play the Matching Game for Module 7. Computerized Accounting Systems There are several pre-packaged computerized accounting systems available on the market today. One of the most widely used includes Peachtree and QuickBooks. These are userfriendly accounting information systems that guide you to organize your business transactions according to Generally Accepted Accounting Principles. It quickly transforms your business transactions into working information that will allow internal and external users of this information to make informed decisions. Although you learned the manual process of the accounting cycle, the computerized version has made the old manual system obsolete. You will be amazed how quickly you can organize your data using a comprehensive information system such as Peachtree and QuickBooks. These systems help you set up an organization by going through the following steps: • Create a new company • Create a chart of accounts • Create lists of customers, vendors, items, employees • Enter business transactions • Create reports End of Module 7 Lecture

Module 8 Lecture LEARNING OBJECTIVES • Nature of Merchandising Businesses • Financial Statements for a Merchandising Business • Merchandising Transactions • Adjusting & Closing Process READ • Chapter 6 • Chapter 6 Summary (PDF) Accounting for Merchandising Businesses Now that we have covered the basic accounting cycle for service organizations, there are a few special considerations for merchandising organizations. Since merchandising organizations have a different treatment of revenue activities, there are special accounts and transactions that are required. The following are a few key formulas for this unit:

Net Sales It is important to understand that all sales will have some defects and/or returns which will be accounted for in the account named SALES RETURNS AND ALLOWANCES. This is a contra-revenue account and will have a normal debit balance. It will appear on the Income Statement when computing net income (or loss). Cost of Merchandise Sold The cost of merchandise sold is more commonly known as cost of goods sold (COGS) which is

located on the Income Statement. This is computed by taking the beginning inventory adding in the net purchases (Gross Purchases – Purchase Discounts – Purchase Returns and Allowances) and the Freight-in less the ending inventory. The cost of merchandise sold is subtracted from the net sales in order to determine the gross profit. Net Income Net income can be computed by using the multiple-step income statement or the single step income statement. The multiple step income statement contains many sections, subsections and subtotals such as Revenues, Cost of Merchandise Sold, Gross Profit, Operating & Administrative Expenses, and Other Income and Expenses which leads to the Net Income. Whereas, the single step income statement is an alternative that provides the total of all of the revenues and expenses in one step. Chart of Accounts Some of the new accounts that will be listed for a merchandising organization include: • Merchandise Inventory • Sales • Sales Returns and Allowances • Sales Discounts • Cost of Merchandise Sold • Delivery Expense • Purchases • Purchase Returns and Allowances • Purchase Discounts Merchandise transactions affect the buyer and the seller. The terms and conditions need to be negotiated prior to the closing of the transaction.

Click here to play the Matching Game for Module 8. End of Module 8 Lecture

Module 9 Lecture LEARNING OBJECTIVES
    

Control of Inventory Inventory Cost Flow Assumptions Perpetual System Periodic System Inventory Costing Methods

READ
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Chapter 7 Chapter 7 Summary (PDF)

Inventories Welcome back! To complete our discussion on merchandising organizations, this week we will concentrate on Inventories. Inventory Control The first step in an organization is maintaining internal controls and safeguards over the organization’s inventory. This process should ensure quality inventory by minimizing or eliminating damage and theft. A comprehensive computerized system can be put in place to accurately account for inventory as well as a system with checks and balances. Many organizations use scanners and barcodes in their inventory system. Other organizations use physical inventory count on a continuous basis or a combination of both. Inventory Cost Flow Assumptions Often the same inventory is purchased at different costs. This creates a situation in accounting in which the organization needs to make a determination of how they will most appropriately determine the cost of the inventory. The most common three types of inventory valuation methods include First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Average Cost. Once an organization makes this valuation determination, it must maintain consistency in valuating inventory for future operations. In a perpetual inventory system, the inventory units and cost of each type of merchandise are recorded in subsidiary inventory ledger with a separate account for each type of merchandise. Whereas in a periodic inventory system, a physical inventory is taken to determine the cost of the inventory and the

cost of the merchandise sold.

The following scenario will be used to demonstrate how to compute ending inventory using each of the three valuation methods: May May May Total FIFO By using the FIFO method, the ending inventory is comprised of the most recent purchases. Often organizations will push the inventory that was purchased first, especially an organization such as a grocery store with perishable goods. It would make sense that the goods that were primarily purchased would be the goods that would be disposed of primarily as well. By using this method, the cost of merchandise sold would be taken from the first purchases of inventory leaving the remaining inventory as the Merchandise Inventory that would be stated on the Assets section of the balance sheet. Using the table above, if one (1) unit was sold, under the FIFO method you would assume that the unit purchased on May 7th was sold and the other two remaining units would make up the ending inventory amount - $118+121 = $239 Merchandise Inventory on the balance sheet. LIFO By using the LIFO method, the ending inventory is comprised of the earliest purchases. By using this method, the cost of the merchandise sold would be taken from the most recent purchases of inventory leaving the remaining earlier purchases as the Merchandise Inventory that would be stated in the Assets section of the balance sheet. Using the table above, if one (1) unit was sold, under the LIFO method you would assume that the unit purchased on May 27th was sold and the other two remaining units would make up the ending inventory amount - $115+118 = $233 Merchandise Inventory on the balance sheet. Average Cost Method By using the average cost method, the cost of all of the purchases is divided by the number of units to find the average. Using the table above, if one (1) unit was sold, under the Average Cost Method you would assume that the average cost of all three units was $118 ($354/3) and the remaining two unit would be computed as $118 x 2 units = $236 Merchandise Inventory on the balance sheet. 7 17 27 Purchase Purchase Purchase 1 1 1 3 $115 $118 $121 $354

Merchandise Inventory is usually reported in the Current Assets section of the Balance Sheet. Remember to maintain consistency once one method is chosen.

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