Professional Documents
Culture Documents
English For Students of Accounting
English For Students of Accounting
Teaching Materials
Pattimura University
Accounting Department
Fakulty of Economic and Business
Patiimura University
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English for Accounting
Table of Contents
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English for Accounting
2. ive, ative
Protect + ive= protective
Object + ive= objective
Compare + ative= comparative
3. ed
Prefer + ed= preferred stock
4. ful
Success + ful= successful
5. ic, ical
Economy + ic= economic
6. ish
Self + ish= selfish
7. less
Value + less= valueless
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8. ous
Continue + ous= continuous
9. Y
Wealth + y=wealthy
1. ance, ence
Appear + ance= appearance
2.tion, sion
3. ee
Lease + ee= 8ctiv
4. er, or
Learn +er= learner
Employ +er=employer
Audit +or= Auditor
Direct + or= director
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5. ry
Brave + ry= bravely
6. hood
Child + hood=childhood
7. ity
Regular + ity= regularity
8. logy
9. ment
Develop + ment= development
10. ness
Complete +ness= completeness
11. ship
1. ate
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English for Accounting
2. ify
3. ise, ize
1. ant, ent
Account + ant= accountant
1. en
Gold +en= golden
Dark +en=darken
1. dis
Dis + advantage= disadvantage
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2. ir
Ir + regular= irregular
Ir + responsible= irresponsible
3. non
Non + cash asset= noncash asset
Non + current= noncurrent
4. un
Un + expired cost= unexpired cost
1. en
En + large= enlarge
1. anti
Anti + trust= antitrust
2. co
Co + operative= cooperative
Co + incident= coincident
3. fore
Fore + see= foresee
4. mid
Mid + term= midterm
5. mis
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English for Accounting
6. multi
8. re
Re + enter= re-enter
Re + acquisition= reacquisition
9. self
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English for Accounting
Chapter One
Why Do We Need Accounting?
Introduction
Accounting has rightly been termed as the language of the business. The basic function of a
language is to serve as a means of communication. Accounting also serves this function. It
communicates the results of business operations to various parties who have some stake in the
business viz., the proprietor, creditors, investor, government and other agencies, though accounting
is generally associated with business but it is not only business which makes use of accounting.
The need for accounting is all the greater for a person who is running a business. The person must
know:
1) What the person owns?
2) What the person owes?
3) Whether the person has earned a profit or suffered a loss on account of running a business?
4) What is the person financial position i.e. whether the person will be in a position to meet all his
commitments in the near future or the person is in the process of becoming a bankrupt?
What is Accounting?
Accounting is concerned with collecting, analyzing and communicating financial information. The
purpose is to help people who use this information to make more informed decisions. If the
financial information that is communicated is not capable of improving the quality of decisions
made, there would be no point in producing it. Sometimes the impression is given that the purpose
of accounting is simply to prepare financial reports on a regular basis. While it is true that
accountants undertake this kind of work, it does not represent an end in itself. The ultimate purpose
of the accountant’s work is to give people better financial information on which to base their
decisions.
Definition of Accounting
Accounting is concerned with the processes of recording, sorting, and summarizing data resulting
from business operations and events. Accounting to American Accounting association accounting is
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The definition given by the American Institute of Certified Public Accountants clearly brings out
the meaning and functions of Accounting. According to it accounting is “the art of recording,
classifying and summarizing in a significant manner and in terms of money, transactions and events
which are, in part at least, of a financial character and interpreting the results thereof.”
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For accounting information to be useful, the accountant must be clear for whom the information is
being prepared and for what purpose the information will be used. There are likely to be various
groups of people (known as ‘user groups’) with an interest in a particular organization, in the sense
of needing to make decisions about it. Figure 1, shows Main users of financial information relating
to a business.
Lenders Government
Comprehension Exercises
A. State whether each of the following statements is “True” or “False”.
-------1. Accounting is the language of business.
-------2. Accounting can be useful only for recording business transactions.
-------3. Accounting records only transactions which are of a financial character.
-------4. Book-keeping and Accounting are synonymous terms.
-------5. Accounting is as old as money itself.
B. Indicate the best answer for each of the following questions:
1. The prime function of accounting is to:
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C. Oral Questions
1. Define Accounting.
2. State its functions
3. How does it differ from book-keeping?
by business big and small ever since. Thankfully, today we have handy accounting softwareto help
us manage our financial records and no longer have to rely on manually-completed ledgers and
spreadsheets. There are two basic categories of accounting: financial accounting and managerial
accounting. Financial accounting deals with information that is made public to stockholders,
customers, creditors, and regulatory bodies. Managerial accounting deals with information that is
not shared with the public, such as salaries, profits, and the cost of goods produced. The goal of
managerial accounting is to help company managers and supervisors make financial decisions,
whereas the goal of financial accounting is to provide important financial information about your
company to those outside of the business. For most small business owners, "accounting" is
managerial accounting.
E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Recording Classifying
Summarizing Reporting
Owners Creditors
Managers Suppliers
Lenders Competitors
Government Investment
Representative Undertake
Certified Ledger
Measure Bookkeeping
Fixed Assets Balance Sheet
Chapter Two
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Accounting Principles
Introduction
It has already been stated in the first chapter that accounting is the language of business through
which normally a business house communicates with the outside world. In order to make this
language intelligible and commonly understood by all, it is necessary that it should be based on
certain uniform scientifically laid down standards. These standards are termed as accounting
principles.
Accounting principles may be defined as those rules of action or conduct which are adopted by the
accountants universally while recording accounting transactions. They are a body of doctrines
commonly associated with the theory and procedures of accounting, serving as an explanation of
current practices and as a guide for selection of conventions or procedures where alternative exist.
These principles can be classified into two categories: 1) Accounting Concepts, 2) Accounting
Conventions
1. Accounting Concepts Introduction
The term ‘concept’ includes those basic assumptions or conditions upon which the science of
accounting is based. The following are the important accounting concepts:
A) Separate entity concept. B) Going concern concept.
C) Money measurement concept. D) Cost concept.
E) Dual aspect concept. F) Accounting period concept.
G) Periodic matching of cost and revenue concept. H) Realization concept.
B. Going Concern Concept: According to this concept it is assumed that the business will continue
for a fairly long time to come. There is neither the intention nor the necessity to liquidate the
particular business venture in the foreseeable future. On account of this concept, the accountant
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while valuing the asset does not take into account forced sale value of assets. Moreover, he charges
depreciation on fixed assets on the basis of their expected lives rather than or their market values.
C. Money Measurement Concept:Accounting records only monetary not find place in the books
of accounts though they may be very useful for the business. Measurement of business events in
money helps in understanding the state of affairs of the business in a much better way.
D. Cost Concept:The concept is closely related to going concern concept. According to this concept;
a) an asset is ordinarily entered on the accounting records at the price paid to acquire it. And b) this
cost is the basis for all subsequent accounting for the asset.
The cost concept does not mean that the asset will always be shown at cost. It has also been stated
above that cost becomes the basis for all future accounting for the asset. It means that asset is
recorded at cost at the time of its purchase but it may systematically be reduced in its value by
charging depreciation.
E. Dual aspect concept: This is the basic concept of accounting. According to this concept every
business transaction has a dual effect. The financial condition or position of a business enterprise is
represented by the relationship of assets to liabilities and capital. This equation expresses the
equality of the assets on one side with the claims of the creditors and owners on the other side:
Assets= Liabilities + Capital
Assets: properties that are owned and have monetary value for instance, cash, inventory, buildings,
equipment…
Liabilities: Amounts owed to outsiders, such as notes payable, accounts payable, bonds
payable…....
Capital: The interest of the owners in an enterprise.
F. Accounting Period Concept: According to this concept, the life of the business is divided into
appropriate segments for studying the results shown by the business after each segment.
G. Periodic matching of costs and revenues concept: This is based on the accounting period
concept. The paramount objective of running a business is to earn profit. In order to ascertain the
profit made by the business during a period, it is necessary that "revenues" of the period should be
matched with the costs (expenses) of that period. The term ‘matching’ means appropriate
association of related revenues and expenses. In order words, income made by the business during
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a period can be measured only when the revenue earned during a period is compared with the
expenditure incurred for earning that revenue.
H. Realization Concept: According to this concept revenue is recognized when a sale is made. Sale is
considered to be made at the point when the property in goods passed to the buyer and the person
becomes legally liable to pay.
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Chapter Three
Accounting Information System (AIS)
Introduction
The study of accounting information systems (AISs) is, in large part, the study of the application
of information technology (IT) to accounting systems. This chapter describes the ways that
information technology affects financial accounting, managerial accounting, auditing, and taxation.
We begin by answering the question ‘‘what are accounting information systems’’ and then look at
some new developments in the field. Following this, we will examine some traditional roles of
AISs in commerce.
Why should you study accounting information systems? There are many reasons, which we will
review briefly in this chapter, but one of the most important is because of the special career
opportunities that will enable you to combine your study of accounting subjects with your interest
in computer systems. In today’s job market, accounting employers expect new hires to be computer
literate. In addition, a large number of specialized employment opportunities are available to those
students who possess a deeper understanding of computer subjects and can bring advanced
computer skills to accounting jobs. The last part of this chapter describes a number of special career
opportunities for those with an interest in AISs.
What Is an Accounting Information System?
A system is a framework that exists for the benefit of one or more defined objectives. Systems
ordinarily use resources and are subject to constraints. They operate within an environment
requiring the specification of the boundaries between the system and the environment. Most
systems have both inputs and outputs. An accounting information system is a delivery system for
accounting information. Its purposes are:
• To meet an organization’s statutory reporting requirements.
• To provide relevant and accurate accounting information to those who need it when they need it.
• To conduct or at least enable most business processes ranging from the recording of sales orders
to the reconciliation of bank accounts after liabilities have been paid.
• To protect the organization from possible risks stemming from abuse of accounting data or of the
system itself.
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Accounting
Accounting Information
Information
systems
Systems
Accounting; you probably have a pretty good understanding of accounting subjects because you
have already taken one or more courses in the area. Thus, you know that the accounting field
includes financial accounting, managerial accounting, and taxation. Accounting information
systems are used in all these areas—for example, to perform tasks in such areas as payroll, accounts
receivable, accounts payable, inventory, and budgeting. In addition, AISs help accountants maintain
general ledger information, create spreadsheets for strategic planning, and distribute financial
reports. Indeed, it is difficult to think of an accounting task that is not integrated, in some way, with
an accounting information system.
Information (versus Data); although the terms data and information are often used
interchangeably, it is useful to distinguish between them. Data are raw facts about events that have
little organization or meaning—for example, a set of raw scores on a class examination. To be
useful or meaningful, most data must be processed into useful information—for example, by
sorting, manipulating, aggregating, or classifying them.
Systems; within the accounting profession, the term ‘‘systems’’ usually refers to ‘‘computer
systems.’’ As you probably know, IT advances are changing the way we do just about everything.
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Comprehension Exercises
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2. While an accounting information system supports each of the organization's primary activities in
the value chain as well as many of the support activities, it can only be categorized into one of the
activities. Into which activity is the accounting information system categorized?
a) Purchasing b) Service c) Firm Infrastructure
d) Operations e) Technology
3. An accounting information system adds value to an organization in many ways. Which of the
following is not a way in which the AIS adds value?
a) Monitoring outputs for defects to increase product quality
b) Providing more timely information
c) Providing more accurate information
d) Sharing expertise
e) Monitoring outputs for defects to reduce the amount of waste
f) All of the above are ways in which an AIS adds value to the organization.
4. Which of the following is not one of the three important functions that an accounting information
system performs?
a) It collects and stores data about activities and transactions so that the organization can review
what has happened in the business.
b) It processes data into information that is useful for making decisions that enable management to
plan, execute, and control activities.
c) It assures that management's decisions optimize the profitability of the company.
d) It provides adequate controls to safeguard the organization's assets, including its data. These
controls ensure that the data is available when needed and that it is accurate and reliable.
C. Oral Questions:
1. A successful accounting information system must provide information for management decision
making. In that management’s decisions evolve around an organization’s strategy, the accounting
information system should be designed to support the organization’s strategy. Describe the two
basic strategies suggested by Michael Porter and identify an organization that you believe follows
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each strategy. Be sure to describe why you believe that the organization follows the strategy you
suggest.
2. In addition to supporting a basic strategy as discussed in question 1, each organization also chooses
strategic positions. Define and discuss the three strategic positions and give an example of each
strategic position. Consider if any of your examples use more than one strategic position.
3. Within the value chain of an organization there are five primary activities and four support
activities. Describe how an accounting information system fits into the value chain of an
organization. Where does it add value?
E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
AIS IT
Commerce Financial Accounting
Managerial Accounting Delivery System
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Chapter Four
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that the real financial position of the business may be much better than what has been shown by the
financial statements.
Personal judgments; personal judgements have also an important bearing on the financial
statements. For example, the choice of selecting method of depreciation lies on the accountant.
Similarly, the mode of amortization of fictitious assets also depends on the personal judgement of
the accountant.
Meaning of Analysis
Financial statements are indicators of two significant factors:
a) Profitability b) Financial soundness
Analysis of financial statements, therefore, refers to such a treatment of the information contained
in the income statement and the balance sheet so as to afford full diagnosis of the profitability and
financial soundness of the business.
The analysis of financial statements required:
a) Methodical classification of the data given in the financial statements.
b) Comparison of the various inter-connected figures, which is popularly known as
“Ratio Analysis”.
Ratio analysis
After the income statement and balance sheet of the business have been redrafted, the financial
analyst should make a comparative study. Absolute figures as such are unfit for comparison.
Therefore, various accounting ratios are calculated.
Classification of Ratios
Ratios can be classified into two different categories depending upon the basis of classification. The
rational classification has been on the basis of the financial statement to which the determinants of
the ratio belong. On this basis the ratios have been classified as follows: a) Profit and Loss account
ratios i.e. ratios calculated on the basis of the items of the profit and loss account only, e.g., Gross
profit ratio, Stock Turnover ratio etc. b) Balance Sheet Ratio, i.e. ratios calculated on the basis of
the figures of balance sheet only e.g., Current Ratio, Debt-equity Ratio etc. c) Complex ratio or
inter-statement ratios, i.e. ratios based on figures of profit and loss account as well as the balance
sheet, e.g., fixed assets turnover ratio, overall profitability ratio etc.
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However, the above basis of classification has been found to be too crude and unsuitable because
analysis of balance sheet and income statement cannot be done in isolation. The have to be studied
together in order to determine the profitability and solvency of the business. In other that ratios
serve as a tool for financial analysis, they are now classified as: a) Profitability Ratios b) Turnover
Ratios c) Financial Ratios.
In the following pages we are explaining the ratios covered by each of the above categories in
detail.
A) Profitability Ratios: profitability is an indication of the efficiency with which the operations of the
business are carried on.
B) Turnover Ratios: the turnover (activity)ratios indicate the efficiency with which the capital
employed is rotated in the basis. The overall profitability of the business depends on two factors: a)
the rate of return on capital employed; and b) the turnover, i,e. the speed at which the capital
employed in the business rotates. Higher the rate of rotation, the greater will be the profitability.
C) Financial Ratios: financial ratios indicate about the financial position of the company. A company
is deemed to be financially sound if it is in a position to carry on its business smoothly and meet all
its obligations-both long-term as well as short-term without strain. The following ratios have
been presented throughout this book, and are summarized below.
Current Ratio Current Assets/Current Liabilities A measure of liquidity; the ability to meet
near-term obligations
Quick Ratio (Cash + Short-term Investment+ A narrow measure of liquidity; the ability
to meet near-term obligations
Accounts Receivable)/ Current Liabilities
Debt to total Assets ratio Total Debt/Total Assets Percentage of assets financed by longterm
and short-term debt
Debt Total Equity Ratio Total Debt/Total Equity Proportion of financing that is Debt-
Related
Times Interest Earned Ratio Income Before Income Taxes and Ability to Meet Interest Obligations
Interest/ Changes
Turnover Ratios
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Accounting Receivable Net Credit Sales/Average Net Accounting Frequency of collection cycle; to monitor
credit policies
Turnover Ratio Receivable
Inventory Turnover Ratio Cost of Goods / Average Inventory Frequency of inventory rotation; to
monitor inventory management
Profitability Ratios
Net profit on Sales Ratio Net income / Net Sales Profitability on sales; for comparison and
trend analysis
Gross profit Margin Ratio Gross Profit/Net Sales Gross profit rate; for comparison and
trend analysis
Return on Assets Ratio (Net Income + Interest Expense)/ Asset utilization in producing returns
Average Assets
Return on Equity Ratio (Net Income-Preferred Dividends)/ Effectiveness of equity investment in
producing returns
Average Common Equity
Other Indicators
EPS Income Available to Common/Weighted- Amount of earnings attributable to each
share of common stock
Average Number of Common Shares
P/E Market price Per Share/ Earning Per The price of the stock in relation to
earning per share
Share
Dividend Rate/Yield Annual Cash Dividend/ Market Price per Direct yield to investors through dividend
payments
Share
Dividend Payout Ratio Annual Cash Dividend/ Earning per Share Proportion of earning distributed as
dividends
Book Value “Common” Equity/ Common Shares The amount of stockholders’ equity per
common share outstanding
Outstanding
3. Ratios alone are not adequate: ratios are only indicators they cannot be taken as final regarding
good or bad financial position of the business.
4. Window dressing: the term window dressing means manipulation of accounts in a way so as to
conceal vital facts and present the financial statements in a way to show a better position than
what it actually is.
5. No fixed standards: no fixed standard can be laid down for ideal ratios.
Comprehension Exercises
A. State whether each of the following statements is “True” or “False” -----1.
Equity to fixed interest bearing securities is Acid Test Ratio.
-----2. Debt equity ratio is solvency ratio.
-----3. Ratio analysis is a technique of planning and control.
-----4. Rate of return on capital employed is a turnover ratio.
-----5. ROI helps in determining the overall profitability of a company.
B. Select the most appropriate answer
1. Ratio of ‘Net Sales ‘to ‘Net working capital’ is:
a) Working capital turnover ratio b) Profitability ratio c) Liquidity ratio
2. Ratio of Net profit before interest and Tax to Sales is:
a) Net operating profit ratio b) Overall profitability ratio c) Solvency ratio
3. Debt equity ratio is:
a) Liquidity ratio b) Solvency ratio c) Profitability ratio
4. Current ratio is a:
a) Solvency ratio b) Financial position ratio c) Turnover ratio
C. Oral (Short-Answer) Questions
1. Explain the meaning of the term” Financial statement” 2.
What do you understand by analysis of financial statement?
3. What are the uses of accounting ratios?
4. State the limitations of financial statements.
Chapter Five
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Source Documents
To begin the accounting cycle, it is necessary to understand what constitutes a business
transaction. Business transactions are measurable events that affect the financial condition of a
business. Business transactions can be the exchange of goods for cash between the business and an
external party, such as the sale of a book, or they can involve paying salaries to employees. These
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events have one fundamentalthing in common: they have caused a measurable change in the
amounts in the accounting equation, assets= liabilities + stockholders' equity. The evidence that a
business event has occurred is a source document. Sales tickets, checks, and invoices are common
source documents. Source documents are important because they are the ultimate proof that a
business transaction has taken place.
After determining, via the source documents, that an event is a business transaction, it is then
entered into the company books via a journal entry. After all the transactions for the period have
been entered into the appropriate journals, the journals are posted to the general ledger. The trial
balance proves that the books are in balance or that the debitsequal the credits. From the trial
balance, a company can prepare their financial statements. After the financials are prepared, the
month end adjusting and closing entries are recorded (journalized) and posted to the appropriate
accounts. After those entries are made, a post-closing trial balance is run. The post-closing trial
balance verifies the debits equal the credits and that all beginning balances for permanent accounts
are in place.
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Highland Yoga
As we walk through the steps of the accounting cycle, consider the following example. After a
number of years as a successful CPA at a national firm, you decide to quit the rat race and pursue
your true love -- yoga. You decide that Atlanta's Virginia-Highland neighborhood would be the
perfect place to open an Ashtanga Yoga studio. Even better, your friend Solomon, a certified
instructor, has just moved to town and is willing to teach at the studio. You hurriedly prepare to
open the studio, Highland Yoga, by July 1.
Pre-opening (before July 1)
Prior to opening the business, you make the following transactions:
1. You contribute $4,000 in cash to start the business.
2. You purchase $500 worth of mats and other equipment for use during classes.
3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.
4. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through
December31.
July
The following transactions take place during July.
1. You receive cash totaling $800 for classes.
2. Your instructor teaches classes for the month. You agree to pay $600 for the classes; $300 is paid
on July 15, and $300 will be paid on August 3.
3. You pay rent for July of $1,000 on July 1.
4. You use utilities (electricity and water) totaling $200. This amount is payable on August 15.
August
The following transactions take place during August.
1. You receive $1,500 in cash for classes. Of this amount, $1,000 was for classes in August. The
remainder is for 2-month passes allowing unlimited classes in August and September.
2. Your instructor again earns $600 teaching classes; $300 due on August 16 and $300 on
September 1.
3. Utilities total $150, payable September 15.
4. You pay rent of $1,000 on August 1.
5. You sell inventory costing $150 for a revenue of $225.
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6. You are worried about money, so your Uncle Rafael makes you an offer. He agrees to loan you
$2,000 in cash. You will need to repay him sometime later, but he doesn't say when.
7. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly,
you agree. The class cost $15.
8. After borrowing money, you decide to withdraw some of your investment in the studio to pursue
other opportunities. You decide to withdraw $1,000.
Comprehension Exercises
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………10. If the dividends declared (and recorded in the dividends account) have not been paid,
dividends is not closed to retained earnings.
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7. What is the first step to take when preparing the financial statements?
a) Preparing a post-closing trial balance
b) Entering the beginning balances
c) Entering the journal entries
d) Preparing the adjusted trial balance
C. Oral Questions:
1. What is full cycle accounting?
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E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Accounting Cycle Reporting Cycle
Calendar Year Entity
Journalize Post-Closing Entries
Trial Balance Source Documents
Stockholders' Equity Adjustment
Debit Double-Entry Bookkeeping
Permanent Accounts Journal Entry
Credit CPA
Invoice Equation
Cash Exchange
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Chapter Six
1. Introduction
Preparing a new equation, A=L + C after each transaction would be cumbersome and costly
especially when there are a great many transactions in an accounting period. Also, information for a
specific item such as cash would be lost as successive transactions were recorded. This information
could be obtained by going back and summarizing the transactions, but that would be very
timeconsuming. A much more efficient way is to classify the transactions according to items on the
balance sheet and income statement. The increases and decreases are then recorded according to
type of item by means of a summary called an account.
2. The Account
A separate account is maintained for each item that appears on the balance sheet (assets, liabilities,
and capital) and on the income statement (revenue and expense). Thus an account may be defined
as a record of the increases, decreases, and balances in an individualitem of asset, liability, capital,
revenue, or expense.
The simplest form of the account is known as the “T” account because it resembles the letter “T”.
The account has three parts: 1) the name of the account and the account number, 2) the debit side
(left side), and (3) the credit side (right side). The increases are entered on one side, the decreases
on the other. Which change goes on which side will be discussed in section 3 the balance (the
excess of the total of one side over the total of the other) is inserted near the last figure on the side
with the larger amount.
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When an amount is entered on the left side of an account, it is a debit and the account is said to be
debited. When an amount is entered on the right side, it is a credit and the account is said to be
credited. The abbreviations for debit and credit are Dr. and Cr., respectively. Whether an increase in
a given item is credited or debited depends on the category of the item. By convention asset and
expense increase are recorded as debits, whereas liability, capital, and income increases are
recorded as credits. Asset and expense decreases are recorded as credits, whereas liability, capital,
and income decreases are recorded as debits. The following tables summarize the rule.
4. The Ledger
The complete set of accounts for a business entity called a Ledger. It is the “reference book” of the
accounting system and is used to classify and summarize transactions and to prepare data for
financial statements. It is also a valuable source of information for managerial purposes, giving, for
example, the amount of sales for the period or the cash balance at the end of the period. Depending
on what method of data processing is used, the ledger may take the form of a bound book with a
page for each account, punched cards, or magnetic tapes or disks. In any case, the accounting
principles are the same.
It is desirable to establish a systematic method of identifying and locating each account in the
ledger. The Chart of Accounts, sometimes called the code of accounts, is a listing of the accounts by
title and numerical designation. In some companies the chart of accounts may run to hundreds of
items. In designing a numbering structure for the accounts, it is important to provide adequate
flexibility to permit expansion without having to revise the basic system. Generally, block of
numbers is assigned to various groups of accounts, such as assets, liabilities, etc. there are various
systems of coding, depending on the needs and desires of the company. A simple chart structure is
to have the first digit represent the major group in which the account is located.
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As every transaction results in an equal amount of debits and credits in the ledger, the total of all
debit entries in the ledger ought to equal the total of all credit entries. At the end of the accounting
period we check this equality by preparing a two-column schedule called a trial balance, which
compares the total of all debit balances with the total of all credit balances. The procedure is as
follows:
2. Record balance of each account, entering debit balance in the left column and credit balances in
the right column.
Note: Asset and expense accounts are debited for increases and would normally have debit
balances. Liabilities, capital, and income accounts are credited for increases and would normally
have credit balances.
Note: If the totals agree, the trial balance is in balance, indicating the equality of the debits and
credits for the hundreds or thousands of transactions entered in the ledger. Although the trial
balance provides arithmetic proof of the accuracy of the records, it does not provide theoretical
proof. In addition to providing proof of arithmetic accuracy in accounting, the trial balance
facilitates the preparation of the periodic financial statements. Generally, the trial balance
comprises the first two columns of a work sheet, from which financial statements are prepared.
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1. Introduction
In the preceding chapters we discussed the nature of business transaction and the manner in which
they are analyzed and classified. The primary emphasis was the why rather than the how of
accounting operations; we aimed at an understanding of the reason for making the entry in a
particular way. We showed the effects of transactions by making entries in T accounts. However,
these entries do not provide the necessary data for a particular transaction, nor do they provide a
chronological record of transactions. The missing information is furnished by the journal.
2. The Journal
The journal, or day book, is the book of original entry for accounting data. Subsequently, the data is
transferred or posted to the ledger, the book of subsequent or secondary entry. The various
transactions are evidenced by sales tickets, purchase invoices, check stubs, etc. on the basis of this
evidence the transactions are entered in chronological order in the journal. The process is called
journalizing.
There are a number of different journals that may be used in a business. For our purposes they may
be grouped into (1) general journals and (2) specialized journals. The latter type, which are used in
businesses with a larger number of repetitive transactions, are described in the next chapter. To
illustrate journalizing, we have used the general journal, whose standard form is shown below.
Date Description P.R Debit Credit
(1) (2) (3) (4) (5)
20xx Cash 11 1,000
Oct.7 Capital 31 1,000
(6) Invested cash in the business
3. Journalizing
We describe the entries in the general journal according to the numbering above.
(1) Date. The year, month, and day of the entry are written in the date column. The year and
month do not have to be repeated for additional entries until a new month occurs or a new
page is needed.
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(2) Description. The account title to be debited is entered on the first line, next to the date
column. The name of the account to be credited is entered on the line below and indented.
(3) P.R. (Posting Reference). Nothing is entered in his column until the particular entry is
posted, that is, until the amounts are transferred to the related ledger accounts. The posting
(4) Debit. The debit amount for each account is entered in this column. Generally there is only
one item. But there could be two or more separate items.
(5) Credit. The credit amount for each account is entered in this column. Here again there is
generally only one account, but there could be two or more accounts involved with different
amounts.
(6) Explanation. A brief description of the transaction is usually made on the line below the
credit. Generally, a blank line is left between the explanation and the next entry.
4. Posting
The process of transferring information from the journal to the ledger for the purpose of
summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in the
following steps:
1. Record the amount and date. The date and the amounts of the debits and credits are
entered in the appropriate accounts.
2. Record the posting reference in the account. The number of the journal page is entered in
the account (dashed line below).
3. Record the posting in the journal. For cross-referencing, the code number of the account
is now entered in the P.R. column of the journal (solid line).
c) Permits better internal control; having separate journals allows the work to be arranged in such a
way that no one personal has conflicting responsibilities.
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Comprehension Exercises
A. State whether each of the following statements is “True” or “False”.
……1. Accounts are records of increases and decreases in individual financial statement items.
……2. A chart of accounts is a listing of accounts that make up the journal.
……3. The chart of accounts should be the same for each business.
……4. Accounts payable are accounts that you expect will be paid to you.
……5. Consuming goods and services in the process of generating revenues results in expenses.
……6. Prepaid expenses are an example of an expense.
……7. Unearned Revenues account is an example of a liability.
……8. The Drawings account is an example of an expense.
……9. Accounts in the ledger are usually maintained in alphabetical order.
2. A company sells goods on credit for £5,000. Which of the following entries correctly records the
transaction?
a) credit trade payables and debit sales £5,000
b) debit trade receivables and credit sales £5,000
c) credit inventories and debit trade receivables £5,000
d) debit cash and credit sales £5,000
6. The following is the trial balance at 31 December 2009 of a company following its first year of
trading which commenced 1 January 2009:
DebitCredit
£000 £000
Share capital 100
Cash and cash equivalents 24
Non-current assets 70
Expenses 10
Trade payables 24
Inventories 6
Sales revenue 36
Trade receivables 32
Cost of sales 18
160 160
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7. The following is the trial balance at 31 December 2009 of a company following its first year of
trading which commenced 1 January 2009:
DebitCredit
£000 £000
Share capital 100
Cash and cash equivalents 24
Non-current assets 70
Expenses 10
Trade payables 24
Inventories 6
Sales revenue 36
Trade receivables 32
Cost of sales 18
160 160
8. The following is the trial balance at 31 December 2009 of a company following its first year of
trading which commenced 1 January 2009:
DebitCredit
£000 £000
Share capital 100
Cash and cash equivalents 24
Non-current assets 70
Expenses 10
Trade payables 24
Inventories 6
Sales revenue 36
Trade receivables 32
Cost of sales 18
160 160
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9. The balance on the telephone account in the profit and loss account for the 12 months to 31
December 2009 is £270,000 (total charges up to 30 September 2009). An accrual is required for last
quarter of the year assuming that charges continue at the same level throughout 2009.What is the
balance on the telephone accrual account at 31 December 2009?
10. The amount of the rent paid and shown in the profit and loss account for the period January
2009 to January 2010 was £312,000. A prepayment is required in respect of January 2010,
assuming that rent payable charges are evenly spread over 2009 and 2010.What is the rent payable
charge for 2009?
a) £288,000 b) £264,000 c) £432,000 d) £336,000
C. Oral Questions
1. What is a trial balance?
2. What is a special ledger?
3. What is a double-entry system?
A business transaction is an activity or event that can be measured in terms of money and which
affects the financial position or operations of the business entity. In other words, it has an effect on
any of the accounting elements – assets, liabilities, capital, income, and expense. Transactions may
be classified as exchange and non-exchange. Exchange transactions involve physical exchange
such as purchasing, selling, collection of receivables, and payment of accounts. Non-exchange
transactions are events that do not involve physical exchanges but where changes in monetary
values are determinable, e.g. wear and tear of equipment, fire loss, typhoon loss, etc. The separate
entity concept or accounting entity assumption clearly establishes a distinction between
transactions of the business and those of its owner/s. If Mr. Bright, owner of Bright Productions,
buys a car for personal use using his own money, it will not be reflected in the books of the
company. Why? Because it does not have anything to do with the business. Now if the company
purchases a delivery truck, then that would be a business transaction of the company. If Mr. Grim
invests $20,000 into the company, would that be recorded in the books of the business? Ask this:
Does it have anything to do with the company? Yes. Then, that would be a recordable business
transaction. In any case, always remember that a business is treated as an individual entity, separate
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and distinct from its owners. Transactions must involve monetary values, meaning a certain amount
of money must be assigned to the elements or accounts affected. For example, Bright Productions
renders video coverage services and expects to collect $10,000 after 10 days. In this case, it's
explicit. The income and receivable can be measured reliably at the $10,000. Fire, typhoon and
other losses may be estimated and assigned with monetary values. The mere request (order) of a
customer is not a recordable business transaction. There should be an actual sale or performance of
service first to give the company a right over the income or revenue. Every transaction has a dual or
two-fold effect. For every value received, there is a value given; or for every debit, there is a credit.
This is the concept of double-entry accounting. For example, Bright Productions purchased tables
and chairs for $6,000. The company received tables and chairs thereby increasing its assets
(increase in Office Equipment). In return, the company paid cash; thus, there is an equal decrease in
assets (decrease in Cash). As part of good accounting and internal control practice, business
transactions must be supported by source documents. The source documents serve as bases in
recording transactions in the journal. Examples of source documents are: Official Receipt issued
whenever cash is received, Sales Invoice for sales transactions, Cash Voucher for payment in cash,
Statement of Account from suppliers, Vendor's Invoice, Promissory Notes, and other business
documents. The first step in the accounting process is actually to prepare the source document and
determine the effects of the business transaction to the accounts of the company. After which, the
accountant records the transaction through a journal entry.
E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Subsequent or Secondary Entry Specialized Journals
Posting Reference Explanation
Detailed Recording Subsidiary Ledgers
Division of Labor Sequence of Accounts
Internal Control T Account
Items Income
Abbreviations Reference Book
Chart (Code) of Accounts Equality
Arithmetic Accuracy Financial Statement
Proof Transaction
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Chapter Seven
Income Statement
Introduction
As a manager, you may be asked to produce or contribute towards an income statement for your
own business unit. This provides senior management with an indication of how your business unit
is performing against its targets over a specific period. The purpose of an income statement is to be
able to measure an organization’s financial performanceover a specific accounting period. It
provides a summary of how its revenues and expenses are incurred, as well as showing if it has
made a net profit or loss.
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Revenue: The increase in capital resulting from the delivery of goods or rendering of services by
the business. In amount, the revenue is equal to the cash and receivables gained in compensation
for the goods delivered or services rendered.
Net Income: The increase in capital resulting from profitable operation of a business; it is the
excess of revenues over expenses for the accounting period.
Net Loss: The decrease in capital resulting from the operations of a business. It is the excess of
expenses over revenue for the accounting period.
Note: It is important to note that a cash receipt qualifies as revenue only if it serves to increase
capital. Similarly, a cash payment in an expense if only it decreases capital. Thus, for instance,
borrowing cash from a bank does not contribute to revenue.
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Income statements are used in a variety of ways both internally and externally to aid the
decisionmaking process.
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Gains Losses
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competitors Competitors
Comprehension Exercises
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……2. An income statement includes taxes the business must pay on its earnings.
……3. Return on investment is net profit divided by start-up investment.
……4. Financial ratio analysis is sometimes called same-size analysis.
……5. Operating ratio is COGS divided by sales.
……6. To calculate profit margin, divide sales into net income.
……7. An income statement shows whether the difference between revenue and net profit is a
profit or a loss
……8. Never disclose your COGS, so you can keep your operating ratio secret.
C. Oral Questions
1. What is an income statement?
2. Describe three uses of financial ratio analysis.
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E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Income Statement Operating Items
Non-Operating Items Net Income
Net Loss Investor
Single-Step Format Multi-Step Format
Gain Annual Percentage
Annual Figures CEO
Business Unit Financial Performance
Assumptions Estimates
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Chapter Eight
Balance Sheet
Introduction
The balance sheet reports as of a given point in time the resources of a business (assets), its
obligations (liabilities), and the residual ownership claims against its resources (owners’ equity).
By analyzing the relationships among these items, investors, creditors, and others can assess a
firm’s liquidity, i.e. its ability to meet short-term obligations, and solvency, i.e., its ability to pay
all current and long-term debts as they come due. The balance sheet also shows the composition of
assets and liabilities, the relative proportions of debt and equity financing, and how much of a
firm’s earnings have been retained in the business.
Balance sheets, especially when compared over time and with additional data, provide a great deal
of useful information to those interested in analyzing the financial well-being of a company. Of
special interest to both creditors and investors in analyzing the balance sheet is the company’s
financial flexibility.
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assets, liabilities and owners' equity. The statement shows assets on the left and liabilities and equity on the
right and it follows the basic equation "assets equal liabilities plus owners' equity."
Assets
Assets are the resources that a business uses to operate its business such as cash, inventories, land
and buildings, and equipment. Essentially, assets are any items of value owned or controlled by the
business that contributes towards generating revenue. Assets are categorized as either current or
non-current assets.
• Current assets:
are items of value that are expected to be consumed or converted into cash within the next
12 months. Examples include cash, inventory that is turning over regularly and accounts
receivable.
• Non-current assets:
are not expected to be consumed or converted into cash within the next 12 months.
Examples include assets that the business would generally keep for more than one year such
as plant and equipment, cars and buildings.
Liabilities
Liabilities are the financial obligations or debts of the business and include claims that creditors
have on the business’s resources such as accounts payable, bank overdrafts, provision for
employees’ annual leave and long service leave, tax liabilities, and loans payable. Essentially,
liabilities are amounts owed by the business to external parties. Liabilities are categorized as either
current or non-current liabilities.
• Current liabilities:
are expected to be paid within the next 12 months and include creditors, (accounts payable),
inventory purchases, overdraft, short-term loans and credit card debts.
• Non-current liabilities:
are not expected to be settled within the next 12 months and include mortgages on buildings
and equipment, and long term loans.
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Owner’s equity
Owners’ equity is the residual interest in the assets of a business after liabilities are deducted. It is
the net worth of a business and equals the difference between assets and liabilities. Equity
represents the amount belonging to the owner once all financial obligations have been met. Equity
includes the initial and ongoing capital investments made by the owners, retained earnings (or
accumulated losses), and reserves. Capital is any cash or assets the owner has contributed to the
business. Retained earnings are any profits that are reinvested in the business. Reserves are profits
set aside for particular purposes such as asset replacement, or major building maintenance. Owner’s
equity is also referred to as proprietorship, member’s funds, capital, or shareholders’ equity.
The form of the balance sheet presentation varies in practice. Its form may be influenced by the
nature and size of the business, by the character of the business properties, by requirements set by
regulatory bodies, or by display preferences in presenting key relationships. The balance sheet is
prepared in one of two basic forms: (1) the account form, with assets being reported on the lefthand
side and liabilities and owners’ equity on the right-hand side, or (2) the report form, with assets,
liabilities, and owners’ equity sections appearing in vertical arrangement.
At the moment an entity begins, its financial status can be recorded on a balance sheet. From that
time on, events occur that change the numbers on this first balance sheet, and the accountant
records these transactions in accordance with the concepts given earlier. Each balance sheet shows
the financial condition of the entity as of the date it was prepared, after giving effect to all of these
changes. Although in practice a balance sheet is prepared only at prescribed intervals, in learning
the accounting process it is useful to consider the changes one by one. This makes it possible to
study the effect of individual events without getting entangled with the mechanisms used to record
these transactions.
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Comprehension Exercises
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E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Liquidity Solvency
Long-term Debts Firm's Earnings
Capital Fund Expenditure
Financial Position Current Assets
Non-Current Assets External Parties
Loans Payable Bank Overdraft
Financial Obligations Retained Earnings
Proprietorship Shareholders
Prescribed Intervals Vertical Arrangement
Business Properties Financial Situation
Chapter Nine
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Fund Flow Statement and Cash Flow Statement are the two useful tools of financial analysis and
interpretations of financial statements. But at the same time both the statements differ from each
other in the following manner:
(1) Fund Flow Statement helps to measure the causes of changes in working capital whereas cash
flow statement focuses on the causes for the movement of cash during a particular period.
(2) Fund flow statement is prepared on the basis of Fund or all financial resources while cash flow
statement is based on cash basis of accounting.
(3) Cash Flow Statement guides to the management for short-term financial planning while Fund
flow analysis helps to the management for intermediate and long-term financial planning.
(4) Statement of changes in working capital is required for the preparation of Fund flow statement
while for cash flow statement no such statement is required.
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balance minus applications of cash is reconciled with the closing balance of cash. The balance
represents cash and bank balances at the end of accounting period.
Sources and Applications of Cash
1-Sources of Cash (Inflow of Cash)
The summary of sources and applications of cash is presented in the chart given below
Sources of Cash Applications of Cash
(Inflow of Cash) (Outflow of Cash)
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(b)When all Transactions are not Cash Transactions: In actual practice, in business transactions
are made either on cash basis or credit basis. For example, goods purchased or sold on cash as well
as on credit. Certain expenses are always outstanding and some of the incomes are not immediately
realized under such circumstances, the net profit made by a firm cannot generate equivalent amount
of cash. Therefore, the charging of non-fund or non-cash items such as outstanding expenses,
incomes received in advances, prepaid expenses and outstanding incomes etc. to profit and loss
account should be readjusted. In such circumstances the actual cash from operations can be
calculated by preparing adjusted profit and loss account.
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Particulars. Rs Particulars Rs
To Depreciation on Fixed Assets By Balance B/D
To Transfer to General Reserve (Opening Balance of P & L A/C)
To Loss on Sale of Fixed Assets By Profit on Sale of Fixed Assets
To Increase in Outstanding Expenses By Profit on Sale of Investments
To Decrease in Prepaid Expenses By Decrease in Outstanding Expenses
To Preliminary Expenses written off By Increase in Prepaid Expenses
To Balance C/D By Cash from Operations
(Closing Balance of P & L A/C) (Balancing figure)
(B)Cash from Operations can also be calculated on the basis of current assets and current liabilities.
Under this method, the amount of changes in the various items of current assets and current
liabilities other than cash and bank balances should be adjusted with the help of Adjusted Profit and
Loss Account. It may be noted that, as compared to above this method may increase or decrease in
items of creditors, stocks, debtors, bills receivable and bills payable are not adjusted while
calculating cash profit from operations and they may be directly taken as Sources (inflow) of Cash
or Application (outflow) of Cash. This method is generally adopted in practice. While applying this
method, the following general principles may be taken for measuring cash from operations:
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Comprehension Exercises
A. State whether each of the following statements is “True” or “False”.
……1. Examples of cash equivalents are treasury bills, money market funds, and commercial
paper.
……2. There are three types of cash flows included in the cash flow statement.
……3. Advance deposits from customers are investing cash flows.
……4. Cash inflows from investing activities would include cash sales of operational assets, cash
sales of long term investments in securities and collection of loan principal.
……5. Net proceeds of issuing debt or equity securities are financing cash flows.
……6. There are three approaches to preparing the operations section of a cash flow statement,
namely the direct method, the semi-direct method, and the indirect method.
……7. Settling debt by transferring non-cash assets is included in the cash flow statement.
……8. When preparing the cash flow statement using the indirect method, increases in current
assets are added to net income to determine cash flow from operations.
……9. When preparing the cash flow statement using the indirect method, increases in current
liabilities are added to net income to determine cash flow from operations.
……10. The income statement and the statement of cash flows are both change statements.
3. Bob Ltd. Reported sales of $200,000 and an increase of $30,000 in accounts receivable in 2005.
Under the direct method, what would be Bob’s cash from customers in 2005?
a) $170,000 b) $200,000
c) $230,000 d) $260,000
4. Hardie Corporation sold a fully depreciated equipment for $1,000. This transaction will be
reported on the cash flow statement as:
a) an operating activity. b) an investing activity.
c) a financing activity. d) none of the above.
5. If during the accounting period sales revenue is $20,000 and accounts receivable increases by
$5,000, cash received from customers for the period:
a) is $25,000. b) is $20,000.
c) is $15,000. d) depends on the proportion of cash and credit sales.
6. Selected information from PoCo's Company's accounting records is as follows:
Cash paid to retire common shares $12,000
Proceeds from issuance of preferred shares $15,000
Cash dividends paid $5,000
Proceeds from sale of equipment $25,000
On its cash flow statement for the year, Central should report net cash flow from financing
activities as:
a) $2,000, net outflow of cash. b) $13,000, net outflow of cash.
c) $23,000, net outflow of cash. d) $25,000, net inflow of cash.
7. Based on the same information as in question 6, PoCo should report net cash flow from investing
activities as:
a) $2,000, net outflow of cash. b) $13,000, net outflow of cash.
c) $23,000, net outflow of cash. d) $25,000, net inflow of cash.
8. Which of the following is not a primary objective of the cash flow statement?
a) To help users assess the overall performance of an enterprise.
b) To help users assess the ability of an enterprise to generate cash from internal sources.
c) To help users assess the liquidity and solvency of an enterprise.
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d) To help users assess the ability of an organization to repay debt obligations and to reinvest or
make distributions to owners.
9. Which of the following is not an appropriate adjustment to reconcile net income with net cash
flow from operating activities (indirect method)? a) An addition for patent amortization.
b) A deduction for bonds payable discount amortization.
c) An addition for a loss on sale of land.
d) An addition for depreciation expense.
10. A stock dividend declared in the period should be reported as which of the following?
a) A cash outflow from investing activities.
b) A cash outflow from financing activities.
c) A cash outflow from operating activities.
d) None of the above.
11. When using the indirect method, an increase in inventory should be reported in the cash flow
statement as:
a) an addition to net income in the computation of cash flows from operating activities.
b) a deduction from net income in the computation of cash flows from operating activities. c)
a financing activity.
d) an investing activity.
12. Which of the following is not an adjustment to net income to determine the net cash flow from
operating activities under the indirect method? a) Increase in accounts receivable.
b) Increase in inventory.
c) Increase in long-term investment.
d) Increase in prepaid expenses.
13. If sales revenue was $100,000, accounts receivable decreased by $4,000, and inventory
increased by $3,000, cash received from customers should be:
a) $98,000 b) $100,000 c) $104,000 d) $101,000
14. Selected information from the 2005 accounting records of Joyce's Auto Dealers is as follows:
Cost of furniture purchased for cash $8,000,
Proceeds from bank loan $100,000
Repayment of bank loan (includes interest of $4,000) $44,000
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C. Oral Questions
1. What are capital expenditures?
2. What is the cash flow statement?
3. How a cash flow statement is prepared?
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E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Cash Outflow Inflow of Cash
Short-Term Obligations Cash Flow Statement
Dividend Policy Retention Policy
Fund Flow Statement Postpone
Debenture Financial Institutions
Redemption Outstanding Income
Outstanding Expense Bills Receivable
Prepaid Expenses Specimen
Equivalent Amount Comprehensive Picture
Interpretation Reconcile
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Chapter Ten
Partnerships
Introduction
The uniform partnership act defines partnership as the association of two or more persons to carry
on as co-owners of a business for profit, whether or not the persons intend to form a partnership.
Because partnerships are so easy to form no formal contract is required this form of business has
the greatest potential for disputes and lawsuits. To prevent misunderstandings among partners,
having a formal partnership agreement, preferably drafted by a lawyer, is advisable.
Advantages
Capitalization: the amountof money invested by the owners of the business is called its
capitalization. The more owners, the more capital. This is one of the main reasons to have a partner-
for his or her money, to help finance business activities.
Talent: the more partners you have, the more talent you have. Of course, that also means more
people will share the profits. The advantage of having more talent is that you can utilize the unique
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skills and abilities of several people. Each partner can specialize in an area of the business that can
best use his or her talents.
Ease of formation: it’s easy to form a partnership. You and the other partners just say you are a
partnership and you are. That’s not the case if you want to operate as a corporation. You must go
through a formal legal process to be incorporated.
Cost of organization: the only cost in becoming a partnership is the legal fee to have the articles of
partnership drawn up. If the partners choose not to do this, then there are no costs at all. Becoming
a corporation requires cash outlays for the application to the state in which you wish to be
incorporated plus legal fees to file the application and preparation of the corporate charter and
bylaws.
Tax advantages: a partnership is not a legal entity, which means it doesn’t have to pay income
taxes. Each partner pays income taxes on personal income, including his or her share of the
partnership income.
Informality: corporations require formal legal procedures to do many of the things you can do as a
partnership without such rigidity.
Less government supervision: generally, partnerships have much less government supervision
than corporations.
Disadvantages
Loss of freedom: you can’t run a partnership as you would a proprietorship. As a sole owner of a
business you answer to no one. But with a partnership you must answer to your partners, and they
to you. You have mutual agency and unlimited liability. This requires mutual agreement on the
affairs of the partnership.
Limited life: if one partner dies or withdraws or a new partner is admitted, the partnership is
dissolved. That does not mean that the business is over. Partners usually provide for this situation in
the articles of partnership.
Unlimited liability: partnerships are not legal entities, so each partner is legally responsible for the
other partners’ actions. As you now know, once the partnership assets are used to settle creditors’
claims, your personal assets and the personal assets of your partners may be required to settle any
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unsatisfied creditors’ claims. Corporations are legal entities and as a result are responsible for their
actions, but only to the extent of their capitalization.
Mutual agency: as we have seen, mutual agency means that any partner can bind the partnership to
any business contract he or she enters into that is within the apparent scope of the partnership’s
business activities. Thus, one partner’s bad judgment can cost all of the other partner large losses,
even if the partner was not authorized by the other partners to make the agreement.
Capitalization: if you need large sums of money to operate your business, the partnership may not
be best form of organization. The corporate form of organization is a much better vehicle for
raising what you need. That’s because you can sell shares of stock to a large number of people who
are interested in a good investment for their money nut don’t want to become involved in the
operations of the business.
Tax disadvantages: depending on your income, you might pay more income taxes as a partnership
than if you organized as a corporation. Since this is subject to whatever tax laws and tax rates are
currently in effect, we can’t give any hard and fast rule. Each partnership has to look at its own
situation.
Co-Ownership of Property
When a partnership is formed, some partners may invest cash, some may invest office equipment or
other assets, some may simply invest their talents. But whatever assets are invested becomes the
property of all the partners. The partner contributing the asset no longer retains any personal right
to that asset. When a partnership is terminated, the individual partners may not receive back the
same assets they contributed. Of course, if it is agreeable to all the partners, the assets may be given
back to those who contributed them. But partners usually settle their claims against the partnership
by the distribution of cash.
Liquidation of a partnership
Partnership liquidation may be caused by the death of a partner, the imminent bankruptcy of the
partnership, or by mutual agreement among all partners. The attorney informed the three friends
that when a partnership is liquidated, the assets are sold (for cash), any outstanding debts and
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liabilities are paid, and the remaining cash, if any, is distributed to the partners. Before the process
begins, however, the accounting cycle should be completed. That is, adjustments should be made,
financial statements prepared, and closing entries recorded and posted. At that point, only the
permanent accounts reported on the balance sheet should contain balances.
The four steps in the liquidation process follow.
1. Sell: all assets (except cash) must be sold for cash and the resulting gain or loss recognized. 2.
Allocate: after all assets have been liquidated (that is, converted to cash), the gain or loss
calculated in step one must be allocated among the partners according to their fixed ratios.
3. Pay: the partnership’s cash is then used to pay all of the partnership’s liabilities.
4. Distribute: any remaining cash can then be distributed to the partners according to their fixed
ratios.
Death of a partner
At the death of a partner the partner the partnership is automatically dissolved. What the account
must do is update the deceased partner’s capital account to the date of death. This requires the
following steps:
1. Closing the partnership books at the date of death, and allocating the income earned since the end
of the previous year between the capital accounts of the deceased and surviving partners.
2. Determining the current value of all the partnership assets at the date of death, and allocating any
appreciation (or depreciation) of these assets between the capital accounts of the deceased and the
surviving partners.
The remaining balance in the capital account for the deceased partner becomes a liability of the
partnership to the estate of the deceased partner. If the articles of partnership contain no provision
detailing how assets will be distributed to the estate, then the remaining partners and the estate will
have to agree on a method of distribution. Many partnerships carry life insurance on each partner,
to pay the estate if a partner dies. Entries for the distribution of assets to the estate are the same as
they are for the withdrawal of a partner.
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Comprehension Exercises
C. Oral Questions
1. What is the difference between partnership and proprietorship?
2. What is a mutual agency?
3. List some of the advantages and disadvantages of partnership.
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E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Partnership Co-owners
Formal Contract Capitalization
Talent Ease of Formation
Cost of Organization Tax Advantages
Informality Supervision
Loss of Freedom Limited Life
Mutual Agency Terminate
Liquidation Imminent
Bankruptcy Attorney
Allocate Withdrawal
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Chapter 11
A corporation is an artificial legal being created by a government charter that endows it with certain
powers. A corporation exists in the eyes of the law as through it were a person separate and distinct
from the people who own it. It has many of the rights that a natural person possesses. It may own
property, borrow money, sue and be used, and in a sense it may even get “married” to another
corporation through a merger. Furthermore, many people own shares in corporations, either directly
or indirectly, through a mutual fund or pension program. Therefore, a corporation must meet the
requirement set forth by the state in which it is incorporated. A company may incorporate in one
state, have its main office in another state, and operate in many states.
The organization structure of largest corporations follows the same basic pattern you will find that
this pattern is modified somewhat to fit the needs of specific organizations. But if you understand
this basic structure, you will have a good grasp of the various parts of the corporate structure.
Figure below shows the basic corporate organization structure and the function of group in the
structure.
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English for Accounting
Owners Stockholders
Policy makers
Board of directors
President
Operation and
managers
Stockholders
The stockholders are the owner of the corporation. Most state corporation laws give the
stockholders certain rights, which usually include the following:
1) The right to receive a certificate as evidence of ownership interest, and to transfer such shares as
they choose through either sale or gift.
2) The right to vote at stockholders’ meetings for the election of direction of directors and on other
matters as may be brought before the stockholders for action.
3) The right to purchase a portion of any new shares issued such that they will own the same
percentage of the total shares after the new issuance of stock as before.
Note: this preemptive right may be given up in some cases by a vote of the stockholders. One such
case may exist when a special stock purchase plan (stock option plan) is initiated to reward toplevel
executives.
4) The right to receive dividends declared by the board the directors. This distribution of profits
usually takes the form of cash, but other assets may be distributed as well.
5) The right to receive assets upon dissolution of the corporation of the corporation if any remain after
the creditors have been paid.
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Board of Directions
The board of directors, elected by the stockholders, is responsible for the management of the
corporation. The board usually delegates the power to make operating decisions and to run the day
to day activities of the business to professional management team. The board normally confines its
attention to 1) making policy, 2) reviewing management performance, and 3) acting on matters that
can legally be decided only by the board. Decisions to expand the business by introducing a new
product or by opening operations in a new geographic area are examples of major policy decisions.
Declaring that dividends will be paid to stockholders is an action that can be taken legally only by
the board.
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Retained earnings, retained earnings represent stockholders’ equity that has accumulated from
profitable operation of the business. Generally, they represent total net income less dividends
declared. Retained earnings result only from operations of the business, and no entries from
transactions in company stock are made to the account. The account is debited for dividends
declared and credited for net income for the period. At the end of the year, Expense and Income
Summary is debited and Retained Earning credited for net income.
Organization Costs
Organization costs, commonly called organization expense by accountants, include the general
costs of launching a business concern. This category consists of fees paid for legal services (such as
the drafting of the corporate charter and bylaws), fees paid for accounting services, costs of issuing
securities, printing, costs, etc. possibly because organization service are in the main invisible and
do not clearly attach to any tangible asset, businessmen and their accountants seem to be anxious to
get such costs written off as soon as possible. Actually, the cost of lunching an enterprise may well
deserve to be maintained as a significant asset for so long as the organization exists.
Treasury Stock
Although Corporations are never obligated to buy their own stock, some companies find it desirable
to do so. A corporation may repurchase its own stock 1) to signal to investors that the company
believes its stock is worth purchasing, 2) to obtain shares that can be reissued as payment for
purchases of other companies, 3) to obtain shares to reissue to employees as part of stock option
plans. When a corporation buys its own stock back from stockholders, the stock is called treasury
stock. While the corporation holds these shares, they do not offer voting, dividend, or other
stockholder rights.
Comprehension Exercises
C. Oral Questions
1. Assume that the expected return on investing in silver is 21%, oil is 17%, and farmland is 6%.
How should their assets be ranked according to their risk?
2. Is it possible to define one investment strategy that is optimal for all investors? Use the concept
of the investment process to explain your answer.
4. Academics and practitioners agree that stock prices change in response to changes in
macroeconomic factors, industry-level factors, and firm-specific factors. One example of a
firmspecific factor that affects stock prices is corporate earnings announcements. Consider the
following statement: “A company’s stock price will increase if the company announces increases
in earnings and dividends.” Is this statement always true, only sometimes true, or never true?
Carefully justify your answer.
typically through a stock exchange, but also may include companies whose stock is traded over the
counter (OTC) via market makers who use non-exchange quotation services such as the OTCBB
and the Pink Sheets. The term "public company" may also refer to a government-owned
corporation. This meaning of a "public company" comes from the tradition of public ownership of
assets and interests by and for the people as a whole (public ownership), and is the less-common
meaning in the United States. Advantages It is able to raise funds and capital through the sale of its
securities. This is the reason why public corporations are so important: prior to their existence, it
was very difficult to obtain large amounts of capital for private enterprises. In addition to being able
to easily raise capital, public companies may issue their securities as compensation for those that
provide services to the company, such as their directors, officers, and employees. PRIVATE
COMPANY The term privately held company refers to the ownership of a business company in two
different ways: first, referring to ownership by non-governmental organizations; and second,
referring to ownership of the company's stock by a relatively small number of holders who do not
trade the stock publicly on the stock market. Because of these two different meanings, the use of
the term should normally be avoided unless the context makes clear which definition is intended.
Less ambiguous terms for a privately held company are unquoted company and unlisted company.
Though less visible than their publicly traded counterparts, private companies have a major
importance in the world's economy. In 2005, the 339 companies on Forbes' survey of closely held
U.S. businesses sold a trillion dollars' worth of goods and services and employed 4 million people.
In 2004, the Forbes' count of privately held U.S. businesses with at least $1 billion in revenue was
only 305. Koch Industries, Bechtel, Cargill, Chrysler, PricewaterhouseCoopers, Flying J, Ernst &
Young, Publix, and Mars are among the largest privately held companies in the United States.
IKEA, Victorinox, and Bosch are examples of Europe's largest privately held companies. There has
been a general confusion among corporate managers about whether to have the status of their
company as private or public. Well, it basically depends on the requirement it needs to be. Notably,
many companies prefer it to be private considering the kind of privileges they enjoy being private.
Here’s a brief list of concessions and privileges which favor formation of private limited
companies: Privileges: - Limited liability, - Simple and easy formation, - Immediate
commencement of business upon incorporation, - Liberal payment of remuneration and loans to
directors without any restrictions, - Easier inter-corporate loans - Lesser disclosure requirements -
Tremendous ease in operation - Two directors are enough - Two Shareholders are adequate - Need
not declare dividend - Listing of shares not mandatory - Directors need not hold qualification
shares These continue to be the dominating factors for carrying on trade and industry through the
medium of private limited companies. Limitations: Nevertheless, there are limitations too. Under
the Companies Act, a private limited company is: - prohibited to issue any invitation to the public
to subscribe to any shares or in debentures of the company - to limit the number of its members to
50 - to restrict the right of its members to transfer shares.
E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Merger Policy Makers
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Chapter 12
Decision Making
Introduction
All organizations require accounting information to manage daily operations, plan future
operations, and evaluate past performance. In addition, most organizations must provide external
financial information to taxing authorities, shareholders, regulatory agencies, labor unions, and so
on. Financial accounting is concerned with providing information to external users. The accounting
process that provides information primarily for internal use is called managerial accounting. We
cannot underestimate the role of accounting information in making decisions and the way managers
use accounting information in the decision process. More specifically cost accounting, which is the
process of determining the cost of products or activities, is essential in external and internal
reporting. Generally speaking, decisions can be classified into two categories. 1) Programmed
decisions are routine and repetitive. 2) Unprogrammed decisions are those that occur infrequently
and require a separate response each time.
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Comprehension Exercises
d) In either monetary or nonmonetary terms, depending upon the need of the decision maker.
2. The basic purpose of an accounting system is to:
a) Develop financial statements in conformity with generally accepted accounting principles.
b) Provide as much useful information to decision makers as possible, regardless of cost.
c) Record changes in the financial position of an organization by applying the concepts of
doubleentry accounting.
d) Meet an organization's need for accounting information as efficiently as possible.
3. Information is cost effective when:
a) The information aids management in controlling costs.
b) The information is based upon historical costs, rather than upon estimated market values.
c) The value of the information exceeds the cost of producing it.
d) The information is generated by a computer-based accounting system.
4. Although accounting information is used by a wide variety of external parties, financial reporting
is primarily directed toward the information needs of: a) Investors and creditors.
b) Government agencies such as the Internal Revenue Service.
c) Customers.
d) Trade associations and labor unions.
5. A complete set of financial statements for Hartman Company, at December 31, 1999, would
include each of the following, except:
a) Balance sheet as of December 31, 1999.
b) Income statement for the year ended December 31, 1999.
c) Statement of projected cash flows for 2000.
d) Notes containing additional information that is useful in interpreting the financial statements.
6. All of the following are characteristics of managerial accounting, except:
a) Reports are used primarily by insiders rather than by persons outside of the business entity.
b) Its purpose is to assist managers in planning and controlling business operations.
c) Information must be developed in conformity with generally accepted accounting principles or
with income tax regulations.
d) Information may be tailored to assist in specific managerial decisions.
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C. Oral Questions
1. What is the difference between managerial accounting and financial accounting?
E. Find the Indonesia equivalents of the following terms and write them in the spaces provided.
New Words Meaning(s) New Words Meaning(s)
Decision Making Process Managerial Accounting
Programmed Decisions Unprogrammed Decisions
Subjective Data Objective Data
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A
Account a record summarizing all the information pertaining to a single item in the accounting equation
Account balance the amount in an account
Account number the number assigned to an account
Account title the name given to an account
Accounting planning, recording, analyzing, and interpreting financial information
Accounting cycle the series of accounting activities included in recording financial information for a fiscal
period
Accounting equation an equation showing the relationship among assets, liabilities, and owner’s equity
Accounting period see Fiscal period
Accounting records organized summaries of a business’s financial activities
Accounting system a planned process for providing financial information that will be useful to management
Accounts expenses; expenses incurred in one fiscal period but not paid until a later fiscal period Accounts
payable ledger a subsidiary ledger containing only accounts for vendors from whom items are purchased
or bought on account
Accounts receivable ledger a subsidiary ledger containing only accounts for charge customers Accounts
receivable turnover ratio the number of times the average amount of accounts receivable is collected
during a specified period
Accrual basis of accounting the accounting method that records revenues when they are earned and
expenses when they are incurred
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English for Accounting
Accrued expenses; expenses incurred in one fiscal period but not paid until a later fiscal period
Accrued interest expense interest incurred but not yet paid
Accrued interest income interest earned but not yet received
Accrued revenue; revenue earned in one fiscal period but not received until a later fiscal period
Accumulated depreciation the total amount of depreciation expense that has been recorded since the
purchase of a plant asset
Acid-test ratio a ratio that shows the numeric relationship of quick assets to current liabilities
Adjusting entries journal entries recorded to update general ledger accounts at the end of a fiscal period
Adjustments changes recorded on a work sheet to update general ledger accounts at the end of a fiscal
period
Administrative expenses budget schedule a statement that shows the projected expenses for all operating
expenses not directly related to selling operations
Aging accounts receivable analyzing accounts receivable according to when they are due
Allowance method of recording losses from uncollectible accounts crediting the estimated value of
uncollectible accounts to a contra account
B
Bad debts see Uncollectible accounts
Balance sheet a financial statement that reports assets, liabilities, and owner’s equity on a specific date
Bank statement a report of deposits, withdrawals, and bank balances sent to a depositor by a bank
Bill of exchange sees Draft
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English for Accounting
Bill of lading a receipt signed by the authorized agent of a transportation company for merchandise received
that also serves as a contract for the delivery of the merchandise
Blank endorsement an endorsement consisting only of the endorser’s signature
Board of directors a group of persons elected by the stockholders to manage a corporation
Bond a printed, long-term promise to pay a specified amount on a specific date and to pay interest at stated
intervals
Bond issue all the bonds representing the total amount of a loan
Bond sinking fund an amount set aside to pay a bond issue when due
Book inventory see perpetual inventory
Book value the difference between an asset’s account balance and its related contra account balance
Book value of a plant asset the original cost of a plant asset minus accumulated depreciation
Book value of accounts receivable the difference between the balances of Accounts Receivable and its
contra account, Allowance for Uncollectible Accounts
Book value per share sees Equity per share
Breakeven point the amount of sales at which net sales is exactly the same as total costs
Budget a written financial plan of a business for a specific period of time, expressed in dollars
Budget period the length of time covered by a budget
Budgeted income statement a statement that shows a company’s projected sales, costs, expenses, and net
income
Budgeting planning the financial operations of a business
C
Capital the account used to summarize the owner’s equity in a business
Capital stock total shares of ownership in a corporation
Cash basis of accounting the accounting method that records revenues when they are received and expenses
when they are paid
Cash budget a statement that shows for each month or quarter a projection of a company’s beginning cash
balance, cash receipts, cash payments, and ending cash balance
Cash discount a deduction from the invoice amount, allowed by a vendor to encourage early payment
Cash flow the cash receipts and cash payments of a company
Cash over a petty cash on hand amount that is more than a recorded amount
Cash payments budget schedule projected cash payments
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English for Accounting
Cash payments journal a special journal used to record only cash payment transactions
Cash receipts budget schedule projected cash receipts
Cash receipts journal a special journal used to record only cash receipt transactions
Cash sale a sale in which cash is received for the total amount of the sale at the time of the transaction
Cash short petty cash on hand amount that is less than a recorded amount
Certificate of deposit a document issued by a bank as evidence of money invested with the bank
Charge sale see Sale on account
Chart of accounts a list of accounts used by a business
Charter the approved articles of incorporation
Check a business form ordering a bank to pay cash from a bank account
Check register a journal used in a voucher system to record cash payments
Checking account, a bank account from which payments can be ordered by a depositor
Closing entries journal entries used to prepare temporary accounts for a new fiscal period
Commercial invoice a statement prepared by the seller of merchandise addressed to the buyer, showing a
detailed listing and description of merchandise sold, including prices and terms
Common stock; stock that does not give stockholders any special preferences
Comparative income statement an income statement containing sales, cost, and expense information for
two or more years
Component percentage the percentage relationship between one financial statement item and the total that
includes that item
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Departmental margin statement a statement that reports departmental margin for a specific department
Departmental statement of gross profit a statement prepared at the end of a fiscal period showing the
gross profit for each department
Depletion the decrease in the value of a plant asset because of the removal of a natural resource
Depreciation expense the portion of a plant asset’s cost that is transferred to an expense account in each
fiscal period during a plant asset’s useful life
Direct expense an operating expense identifiable with and chargeable to the operation of a specific
department
Direct labor salaries of factory workers who make a product
Direct materials; materials that are of significant value in the cost of and that become an identifiable part of
a finished product
Direct write-off method of recording losses from uncollectible accounts recording uncollectible accounts
expense only when an amount is actually known to be uncollectible
Discount on capital stock an amount less than par or stated value at which capital stock is sold
Dishonored check a check that a bank refuses to pay
Dishonored note a note that is not paid when due
Distribution of net income statement a partnership financial statement showing net income or loss
distribution to partners
Dividends earnings distributed to stockholders
Double-entry accounting the recording of debit and credit parts of a transaction
Doubtful accounts see Uncollectible accounts
Draft a written, signed, and dated order from one party ordering another party, usually a bank, to pay money
to a third party
E
Earnings per share the amount of net income belonging to a single share of stock
Electronic funds transfer a computerized cash payments system that uses electronic impulses to transfer
funds
Employee benefits payments to employees for non-working hours and to insurance and retirement programs
Employee earnings record a business form used to record details affecting payments made to an employee
Encumbrance a commitment to pay for goods or services that have been ordered but not yet provided
Endorsement a signature or stamp on the back of a check transferring ownership
Endorsement in full sees Special endorsement
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English for Accounting
G
Gain on plant assets revenue that results when a plant asset is sold for more than book value
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English for Accounting
General amount column a journal amount column that is not headed with an account title
General fixed assets governmental properties that benefit future periods
General journal a journal with two amount columns in which all kinds of entries can be recorded
General ledger a ledger that contains all accounts needed to prepare financial statements
Goodwill the value of a business in excess of the total investment of owners
Gross earnings see Total earnings
Gross pay sees Total earnings
Gross profit method of estimating inventory estimating inventory by using the previous year’s percentage
of gross profit on operations
Gross profit on sales the revenue remaining after cost of merchandise sold has been deducted
I
Imports goods or services bought from a foreign country and brought into a buyer’s home country
Income statement a financial statement showing the revenue and expenses for a fiscal period
Indirect expense an operating expense chargeable to overall business operations and not identifiable with a
specific department
Indirect labor salaries paid to factory workers who are not actually making products
Indirect materials; materials used in the completion of a product that are of insignificant value to justify
accounting for separately
Intangible assets; assets of a non-physical nature that have value for a business
Interest an amount paid for the use of money for a period of time
Interest expense the interest accrued on money borrowed
Interest income the interest earned on money loaned
Interest rate of a note the percentage of the principal that is paid for use of the money
Interim departmental statement of gross profit a statement showing gross profit for each department for a
portion of a fiscal period Internal auditor sees Auditor
Inventory the amount of goods on hand
Inventory record a form used during a periodic inventory to record information about each item of
merchandise on hand
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English for Accounting
Investing activities cash receipts and cash payments involving the sale or purchase of assets used to earn
revenue over a period of time
Invoice a form describing the goods or services sold, the quantity, and the price J
L
Last-in, first-out inventory costing method using the price of merchandise purchased last to calculate the
cost of merchandise sold first
Ledger a group of accounts
Letter of credit a letter issued by a bank guaranteeing that a named individual or business will be paid a
specified amount, provided stated conditions are met
Liability an amount owed by a business
LIFO sees Last-in, first-out inventory costing method
Liquidation of a partnership the process of paying a partnership’s liabilities and distributing remaining
assets to the partners
List price a business’s printed or catalog price
Long-term assets see Plant assets
Long-term liabilities; liabilities owed for more than a year
Loss on plant assets the loss that results when a plant asset is sold for less than book value
Lower of cost or market inventory costing method using the lower of cost or market price to calculate the
cost of ending merchandise inventory
M
MACRS see Modified Accelerated Cost Recovery System
Maker of a note the person or business who signs a note and thus promises to make payment
Management advisory services management advice provided to an organization by a private accountant
Managerial accounting the analysis, measurement, and interpretation of financial accounting information
Marginal income see Contribution margin
Market value the price at which a share of stock may be sold on the stock market
Markup the amount added to the cost of merchandise to establish the selling price
Materials ledger a ledger containing all records of materials
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N
Net income the difference between total revenue and total expenses when total revenue is greater
Net loss the difference between total revenue and total expenses when total expenses is greater
Net pay the total earnings paid to an employee after payroll taxes and other deductions
Net purchases total purchases less purchases discount and purchases returns and allowances
Net sales total sales less sales discount and sales returns and allowances
No-par-value stock a share of stock that has no authorized value printed on the stock certificate
Nominal accounts see Temporary accounts
Nonprofit organization; see Not-for-profit organization
Normal balance the side of the account that is increased
Not-for-profit organization an organization providing goods or services with neither a conscious motive
nor expectation of earning a profit
Note see Notes payable
Notes payable promissory notes signed by a business and given to a creditor
Notes receivable promissory notes that a business accepts from customers Number
of a note the number assigned to identify a specific note
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Opening an account writing an account title and number on the heading of an account
Operating activities, the cash receipts and payments necessary to operate a business on a day-to-day basis
Operating budget, a plan of current expenditures and the proposed means of financing those expenditures
Organization costs fees and other expenses of organizing a corporation
Other revenue and expenses budget schedule budgeted revenue and expenses from activities other than
normal operations
Over applied overhead the amount by which applied factory overhead is more than actual factory overhead
Overhead see Factory overhead
Owner’s equity the amount remaining after the value of all liabilities is subtracted from the value of all
assets
Owners’ equity statement a financial statement that summarizes the changes in owners’ equity during a
fiscal period
Par value a value assigned to a share of stock and printed on the stock certificate
Par-value stock a share of stock that has an authorized value printed on the stock certificate
Partner each member of a partnership
Partnership a business in which two or more persons combine their assets and skills
Partnership agreement a written agreement setting forth the conditions under which a partnership is to
operate
Pay period the period covered by a salary payment
Payee of a note the person or business to whom the amount of a note is payable
Payroll the total amount earned by all employees for a pay period
Payroll register a business form used to record payroll information
Payroll taxes; taxes based on the payroll of a business
Performance report a report showing a comparison of projected and actual amounts for a specific period of
time
Periodic inventory a merchandise inventory determined by counting, weighing, or measuring items of
merchandise on hand
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Permanent accounts; accounts used to accumulate information from one fiscal period to the next Perpetual
inventory a merchandise inventory determined by keeping a continuous record of increases, decreases, and
balance on hand
Personal financial planning assisting individuals in managing their personal investments
Personal property all property not classified as real property
Petty cash an amount of cash kept on hand and used for making small payments
Petty cash slip a form showing proof of a petty cash payment
Physical inventory see Periodic inventory
Plant asset record an accounting form on which a business records information about each plant asset
Plant assets: assets that will be used for a number of years in the operation of a business
Post-closing trial balance a trial balance prepared after the closing entries are posted
Postdated check a check with a future date on it
Posting transferring information from a journal entry to a ledger account
Preferred stock; stock that gives stockholders preference in earnings and other rights
Prepaid expenses; expenses paid in one fiscal period but not reported as expenses until a later fiscal period
Price-earnings ratio the relationship between the market value per share and earnings per share of a stock
Principal of a note the original amount of a note; sometimes referred to as face amount of a note
Production-unit method of depreciation calculating estimated annual depreciation expense based on the
amount of production expected from a plant asset
Promissory note a written and signed promise to pay a sum of money at a specified time
Proprietorship a business owned by one person
Proving cash determining that the amount of cash agrees with the accounting records
Purchase invoice an invoice used as a source document for recording a purchase on account transaction
Purchase order a completed form authorizing a seller to deliver goods with payment to be made later
Purchases allowance credit allowed for part of the purchase price of merchandise that is not returned,
resulting in a decrease in the customer’s accounts payable
Purchases budget schedule a statement prepared to show the projected amount of purchases that will be
required during a budget period
Purchases discount a cash discount on purchases taken by a customer
Purchases journal a special journal used to record only purchases of merchandise on account
Purchases return credit allowed for the purchase price of returned merchandise, resulting in a decrease in
the customer’s accounts payable
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Quick assets those current assets that are cash or that can be quickly turned into cash
Rate earned on average stockholders’ equity the relationship between net income and average
stockholders’ equity
Rate earned on average total assets the relationship between net income and average total assets
Rate earned on net sales the rate found by dividing net income after federal income tax by net sales
Ratio a comparison between two numbers showing how many times one number exceeds the other
Real accounts see Permanent accounts
Real estate sees Real property
Real property land and anything attached to the land
Realization cash received from the sale of assets during liquidation of a partnership
Receipt a business form giving written acknowledgement for cash received
Residual value; see Estimated salvage value
Responsibility accounting assigning control of business revenues, costs, and expenses as a responsibility of
a specific manager
Responsibility statements financial statements reporting revenue, costs, and direct expenses under a
specific department’s control
Restrictive endorsement an endorsement restricting further transfer of a check’s ownership
Retail merchandising business a merchandising business that sells to those who use or consume the goods
Retail method of estimating inventory estimating inventory by using a percentage based on both cost and
retail prices
Retained earnings an amount earned by a corporation and not yet distributed to stockholders
Retiring a bond issue paying the amounts owed to bondholders for a bond issue
Revenue an increase in owner’s equity resulting from the operation of a business
Reversing entry an entry made at the beginning of one fiscal period to reverse an adjusting entry made in
the previous fiscal period
S
Salary the money paid for employee services
Sale on account a sale for which cash will be received at a later date
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English for Accounting
Sales allowance credit allowed a customer for part of the sales price of merchandise that is not returned,
resulting in a decrease in the vendor’s accounts receivable
Sales budget schedule a statement that shows the projected net sales for a budget period
Sales discount a cash discount on sales
Sales invoice an invoice used as a source document for recording a sale on account
Sales journal a special journal used to record only sales of merchandise on account
Sales mix relative distribution of sales among various products
Sales return credit allowed a customer for the sales price of returned merchandise, resulting in a decrease in
the vendor’s accounts receivable
Sales slip see Sales invoice
Sales tax a tax on a sale of merchandise or services
Salvage value see estimated salvage value
Schedule of accounts payable a listing of vendor accounts, account balances, and total amount due all
vendors
Schedule of accounts receivable a listing of customer accounts, account balances, and total amount due
from all customers
Scrap value see estimated salvage value
Selling expenses budget schedule, a statement prepared to show projected expenditures related directly to
the selling operations
Serial bonds portions of a bond issue that mature on different dates
Service business a business that performs an activity for a fee
Share of stock each unit of ownership in a corporation
Sight draft a draft payable on sight when the holder presents it for payment
Social security tax a federal tax paid for old-age, survivors, and disability insurance
Sole proprietorship sees Proprietorship
Source document a business paper from which information is obtained for a journal entry
Special amount column a journal amount column headed with an account title
Special endorsement an endorsement indicating a new owner of a check
Special journal a journal used to record only one kind of transaction
State unemployment tax a state tax used to pay benefits to unemployed workers
Stated-value stock no-par-value stock that is assigned a value by a corporation
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English for Accounting
Statement of cash flows a statement that summarizes cash receipts and cash payments resulting from
business activities during a fiscal period
Statement of cost of goods manufactured a statement showing details about the cost of finished goods
Statement of stockholders’ equity a financial statement that shows changes in a corporation’s ownership
for a fiscal period
Stock certificate written evidence of the number of shares each stockholder owns in a corporation
Stock ledger a file of stock records for all merchandise on hand
Stock record a form used to show the kind of merchandise, quantity received, quantity sold, and balance on
hand
Stockholder an owner of one or more shares of a corporation
Stockholders’ equity value of the owners’ equity in a corporation
Straight-line method of depreciation charging an equal amount of depreciation expense for a plant asset in
each year of useful life
Subscribing for capital stock entering into an agreement with a corporation to buy capital stock and pay at
a later date
Subsidiary ledger a ledger that is summarized in a single general ledger account
Sum-of-the-years-digits method of depreciation using fractions based on years of a plant asset’s useful life
Supplementary report sees supporting schedule
Supporting schedule, a report prepared to give details about an item on a principal financial statement
Variable costs total costs that change in direct proportion to a change in the number of units
Vendor a business from which merchandise is purchased or supplies or other assets are bought
Vertical analysis sees Component percentage
Voucher a business form used to show an authorized person’s approval for a cash payment
Voucher check a check with space for writing details about a cash payment
Voucher jacket see Voucher
Voucher register a journal used to record vouchers
Voucher system a set of procedures for controlling cash payments by preparing and approving vouchers
before payments are made
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Weighted-average inventory costing method using the average cost of beginning inventory plus
merchandise purchased during a fiscal period to calculate the cost of merchandise sold
Wholesale merchandising business a business that buys and resells merchandise to retail merchandising
businesses
Withdrawals assets taken out of a business for the owner’s personal use
Withholding allowance, a deduction from total earnings for each person legally supported by a taxpayer,
including the employee
Work in process products that are being manufactured but are not yet complete
Work sheet a columnar accounting form used to summarize the general ledger information needed to
prepare financial statements
Working capital, the amount of total current assets less total current liabilities
Writing off an account canceling the balance of a customer account because the customer does not pay
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References
- Cashin, James, A. Lerner, Joel, J. (1987). “Theory and Problems of Accounting I” 3 th Edition,
McGraw-Hill Book Company.
- http://parsitest.com
- http://www.principlesofaccounting.com
- http://www.referenceforbusiness.com
- Patricia A. Libby, Robert Libby, Fred Phillips, Stacey Whitecotton. (2009). “Principles of
Accounting” McGraw-Hill International Edition.
- Robert N. Anthony, David F. Hawkins. (2011) “Accounting Text and Cases” 13 th Edition.
McGraw. Hill International Edition.
- Smith. Jay M. Skousen, K. Fred. (1989). “Intermediate Accounting”11 th Edition, College Division
South-western Publishing Co.
- W. Steve Albercht, Earl K. Stice, James D. Stice, Monte R. Swain. (2008). “Accounting Concepts
and Applications”. Thomson Suth Western.
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