Accounting Table Of contents

Contents
DEFINITION OF ACCOUNTING......................................................................................................................6
Nature of Business and Accounting.............................................................................................................6
Role of Accounting in Business....................................................................................................................6
Managerial Accounting................................................................................................................................6
Financial Accounting....................................................................................................................................6
Role of Ethics in Accounting and Business (slide 1 of 3)..............................................................................7
Cost Concept...............................................................................................................................................7
Income Statement.......................................................................................................................................7
Statement of Owner’s Equity......................................................................................................................7
Balance Sheet..............................................................................................................................................8
Statement of Cash Flows.............................................................................................................................8
Ratio of liabilities to owners equity.............................................................................................................8
Definition Of Account..................................................................................................................................8
Ledger..........................................................................................................................................................8
Chart Of Account.........................................................................................................................................9
Journal.........................................................................................................................................................9
Format of journalizing an entry...................................................................................................................9
Purchased supplies on account...................................................................................................................9
• received cash of $7,500 from customers for services provided.........................................................10

.................................................................................................................................................................. 10
paid creditors on account..........................................................................................................................10
purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand
at November 30 was $550.........................................................................................................................10
POSTING....................................................................................................................................................10
paid a premium of $2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-
year period................................................................................................................................................11
Unearned Revenue....................................................................................................................................11
purchased office equipment on account from Executive Supply Co. for $1,800.......................................11
paid creditors............................................................................................................................................11
received $3,100 from fees earned for the first half of December.............................................................12
Fees earned on account totaled $1,750 for the first half of December.....................................................12
paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction..............12
received $650 from customers in payment of their accounts...................................................................12
paid $1,450 for supplies............................................................................................................................13
fees earned on account.............................................................................................................................13
Transposition error....................................................................................................................................13
SLIDE ERROR..............................................................................................................................................13
Financial Analysis and Interpretation: Horizontal Analysis........................................................................13
ACCRUAL DEFINITION................................................................................................................................13
ACCRUAL JOURNAL ENTRY........................................................................................................................14
DEFFERAL JOURNAL ENTRY.......................................................................................................................14
ACCOUNT NUMBERS FOR EACH TRANSACTION........................................................................................15
Assume that NetSolutions signed an agreement with Dankner Co. on December 15 to provide services at
a rate of $20 per hour. As of December 31, NetSolutions had provided 25 hours of services. The revenue
will be billed on January 15.......................................................................................................................15
At the end of the current year, $13,680 of fees have been earned but have not been billed to clients.
Journalize the adjusting entry to record the accrued fees........................................................................16

.................................................................................................................................................................. 16
NetSolutions pays it employees biweekly. During December, NetSolutions paid wages of $950 on
December 13 and $1,200 on December 27. As of December 31, NetSolutions owes $250 of wages to
employees for Monday and Tuesday, December......................................................................................16
balance in the unearned rent account of $360. This balance represents the receipt of three months’ rent
on December 1 for December, January, and February. At the end of December, one month’s rent has
been earned..............................................................................................................................................16
Effects of Omitting the Adjusting Entry for Unearned Revenues..............................................................17
Adjusting Enteries......................................................................................................................................18
ADJUSTED INCOME STATEMENT...............................................................................................................19
ADJUSTED BALANCE SHEET.......................................................................................................................20
DETAILS OF ACCOUNT OF PREPAID AND ACCRUAL...................................................................................20
FLOWCHART OF CLOSING ENTERIES..........................................................................................................21
Working Capital.........................................................................................................................................22
Purchase Discount.....................................................................................................................................22
Purchase Return........................................................................................................................................22
Purchase return and allowance.................................................................................................................23
cost of merchandise sold on March 3 is $1,200. The entry to record the cost of merchandise sold and the
decrease in the merchandise inventory is as follows:...............................................................................23
sold merchandise on account for $6,000. The cost of the merchandise sold was $3,500.........................23
sold $18,000 of merchandise to Digital Technologies on March 10 with credit terms 2/10, n/30. The cost
of the merchandise sold was $10,800.......................................................................................................24

.................................................................................................................................................................. 24
payment by Digital Technologies...............................................................................................................24
Sales return on account.............................................................................................................................24
Debit Memo..............................................................................................................................................24
Credit memo..............................................................................................................................................24
Bormann Enterprises returned merchandise with a selling price of $3,000 for a cash refund. The
merchandise originally cost NetSolutions $2,100......................................................................................24
Estimated Return Inventory......................................................................................................................25
Journal Entries to Record Customer Refunds, Allowances, and Returns...................................................25
free on board) shipping point...................................................................................................................25
Purchased merchandise from Magna Data, $900, terms FOB shipping point...........................................25
10. Paid freight of $50 on June 10 purchase from Magna Data...........................................................25
.................................................................................................................................................................. 25
FOB (free on board) destination...............................................................................................................26
Sold merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the
merchandise sold is $480..........................................................................................................................26
NetSolutions pays freight of $40 on the sale of June 15............................................................................26
The seller may prepay the freight, even though the terms are FOB shipping point. The seller will then
add the freight to the invoice....................................................................................................................26
Sold merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid
freight of $45, which was added to the invoice. The cost of the merchandise sold is $360......................27

.................................................................................................................................................................. 27
Recording Merchandise Inventory Transactions.......................................................................................27
Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the
merchandise sold is $6,900.......................................................................................................................28
seller would record a sale of $100 on account, subject to a tax of 6%, as follows....................................28
seller pays to the taxing authority (state) the amount of the sales tax collected. The seller records such a
payment as follows:...................................................................................................................................28
inventory shrinkage is recorded by the following adjusting entry:............................................................28
DEFINITION OF ACCOUNTING
• Accounting can be defined as an information system that provides reports to users about the
economic activities and condition of a business.

Nature of Business and Accounting

• A business is an organization in which basic resources (inputs), such as materials and labor, are
assembled and processed to provide goods or services (outputs) to customers.

• The objective of most businesses is to earn a profit.

• Profit is the difference between the amounts received from customers for goods or services and
the amounts paid for the inputs used to provide the goods or services.

Role of Accounting in Business

• Accounting can be defined as an information system that provides reports to users about the
economic activities and condition of a business.

• The process by which accounting provides information to users is as follows:

– Identify users.

– Assess users’ information needs.

– Design the accounting information system to meet users’ needs.

– Record economic data about business activities and events.

– Prepare accounting reports for users.

Managerial Accounting
• The area of accounting that provides internal users with information is called managerial
accounting, or management accounting.

• Managerial accountants employed by a business are employed in private accounting.

Financial Accounting
• The area of accounting that provides external users with information is called financial
accounting.

• The objective of financial accounting is to provide relevant and timely information for the
decision-making needs of users outside of the business.
 • General-purpose financial statements are one type of financial accounting report that is
distributed to external users.

Role of Ethics in Accounting and Business

(slide 1 of 3)
• The objective of accounting is to provide relevant, timely information for user decision making.

• Accountants must behave in an ethical manner so that the information they provide users will
be trustworthy and, thus, useful for decision making.

• Ethics are moral principles that guide the conduct of individuals.

Cost Concept
• Under the cost concept, amounts are initially recorded in the accounting records at their cost or
purchase price.

Income Statement
• The income statement reports the revenues and expenses for a period of time, based on the
matching concept.

• The matching concept is applied by “matching” the expenses incurred during a period with the
revenue that those expenses generated.

• The excess of the revenue over the expenses is called net income, net profit, or earnings. If
expenses exceed revenue, the excess is a net loss.

Statement of Owner’s Equity

Balance Sheet

Statement of Cash Flows

Ratio of liabilities to owners equity

Definition Of Account
Accounting systems are designed to show the increases and decreases in each accounting equation
element as a separate record. This record is called an account

Ledger
• A group of accounts for a business entity is called a ledger.
Chart Of Account
• A list of the accounts in the ledger is called a chart of accounts.

Journal
• A transaction is initially entered in a record called a journal.

Format of journalizing an entry

Purchased supplies on account

 • received cash of $7,500 from customers for services provided.

paid creditors on account

purchased $1,350 of supplies on November 10. Chris Clark determined

that the cost of supplies on hand at November 30 was $550.

POSTING
• The process of transferring the debits and credits from the journal entries to the accounts is
called posting.
 paid a premium of $2,400 for an insurance policy for liability,
theft, and fire. The policy covers a one-year period.

Unearned Revenue

purchased office equipment on account from Executive Supply Co. for

$1,800.

paid creditors
received $3,100 from fees earned for the first half of December.

Fees earned on account totaled $1,750 for the first half of

December.

paid $900 to Executive Supply Co. on the $1,800 debt owed from
the December 4 transaction.

received $650 from customers in payment of their accounts.

paid $1,450 for supplies.

fees earned on account

Transposition error
• A transposition occurs when the order of the digits is copied incorrectly, such as writing $542 as
$452 or $524.

SLIDE ERROR
• In a slide, the entire number is copied incorrectly one or more spaces to the right or the left,
such as writing $542.00 as $54.20 or $97.50 as $975.00.

Financial Analysis and Interpretation: Horizontal Analysis

• In horizontal analysis, the amount of each item on a current financial statement is compared
with the same item on an earlier statement.

• When two statements are being compared, the earlier statement is used as the base for
computing the amount and the percent of change.

ACCRUAL DEFINITION
• accrual occurs when revenue has been earned or an expense has been incurred but has not
been recorded.
ACCRUAL JOURNAL ENTRY

DEFFERAL JOURNAL ENTRY

ACCOUNT NUMBERS FOR EACH TRANSACTION

Assume that NetSolutions signed an agreement with Dankner Co.

on December 15 to provide services at a rate of $20 per hour. As of
December 31, NetSolutions had provided 25 hours of services. The
revenue will be billed on January 15.
At the end of the current year, $13,680 of fees have been earned but
have not been billed to clients. Journalize the adjusting entry to record
the accrued fees.

NetSolutions pays it employees biweekly. During December,

NetSolutions paid wages of $950 on December 13 and $1,200 on
December 27. As of December 31, NetSolutions owes $250 of wages to
employees for Monday and Tuesday, December

balance in the unearned rent account of $360. This balance

represents the receipt of three months’ rent on December 1 for
December, January, and February. At the end of December, one
month’s rent has been earned.
Effects of Omitting the Adjusting
Entry for Unearned Revenues
Adjusting Enteries
ADJUSTED INCOME STATEMENT
ADJUSTED BALANCE SHEET

DETAILS OF ACCOUNT OF PREPAID AND ACCRUAL

1. Jason Corbin, Capital

2. Notes Receivable (due in six months)

3. Notes Payable (due in 10 years)

4. Land

5. Cash

6. Unearned Rent (three months)

7. Accumulated Depreciation—Equipment

8. Accounts Payable
FLOWCHART OF CLOSING ENTERIES
Working Capital
Working Capital = Current Assets – Current Liabilities

Purchase Discount

Purchase Return
 Purchase return and allowance

cost of merchandise sold on March 3 is $1,200. The entry to record the

cost of merchandise sold and the decrease in the merchandise inventory
is as follows:

sold merchandise on account for $6,000. The cost of the merchandise

sold was $3,500.
 sold $18,000 of merchandise to Digital Technologies on March 10
with credit terms 2/10, n/30. The cost of the merchandise sold was
$10,800.

payment by Digital Technologies

Sales return on account

Debit Memo
Purchases Return

Credit memo
Sales return

Bormann Enterprises returned merchandise with a selling price of

$3,000 for a cash refund. The merchandise originally cost
NetSolutions $2,100
Estimated Return Inventory
Estimated returns inventory is a current asset

Journal Entries to Record Customer Refunds, Allowances, and Returns

free on board) shipping point.

• This term means that the buyer pays the freight costs from the shipping point to
the final destination.

– Such costs are part of the buyer’s total cost of purchasing inventory and
are added to the cost of the inventory by debiting Merchandise
Inventory.

Purchased merchandise from Magna Data, $900, terms FOB

shipping point.
10. Paid freight of $50 on June 10 purchase from Magna
Data.

FOB (free on board) destination.

• This term means that the seller pays the freight costs from the shipping point to
the buyer’s final destination.
 – When the seller pays the delivery charges, the seller debits Delivery
Expense or Freight Out.

» Delivery Expense is reported on the seller’s income statement

as a selling expense.

Sold merchandise to Kranz Company on account, $700, terms FOB

destination. The cost of the merchandise sold is $480.
NetSolutions pays freight of $40 on the sale of June 15.

The seller may prepay the freight, even though the terms are FOB
shipping point. The seller will then add the freight to the invoice
– The buyer debits Merchandise Inventory for the total amount of the invoice, including
the freight.

– Any discount terms would not apply to the prepaid freight.

 Sold merchandise to Planter Company on account, $800, terms
FOB shipping point. NetSolutions paid freight of $45, which was
added to the invoice. The cost of the merchandise sold is $360.

Recording Merchandise Inventory Transactions

Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms
2/15, n/30. The cost of the merchandise sold is $6,900

seller would record a sale of $100 on account, subject to a tax of 6%, as

follows

seller pays to the taxing authority (state) the amount of the sales tax
collected. The seller records such a payment as follows:

inventory shrinkage is recorded by the following adjusting entry: