Accounting demystified

Kế toán

Accounting Demystified 10288$ $$FM 08-29-03 08:30:20 PS 10288$ $$FM 08-29-03 08:30:21 PS This page intentionally left blank Accounting Demystified Jeffry R. Haber, Ph.D., CPA American Management Association New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C. 10288$ $$FM 08-29-03 08:30:22 PS Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Haber, Jeffry R., 1960– Accounting demystified / Jeffry R. Haber. p. cm. ISBN 0-8144-0790-0 1. Accounting. I. Title. HF5635.H112 2004 657—dc22 2003017265 ᭧ 2004 Jeffry R. Haber All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Printing number 10987654321 10288$ $$FM 08-29-03 08:30:22 PS Contents Acknowledgments ix Chapter 1 Introduction 1 Chapter 2 Financial Statements 4 Income Statement 5 Statement of Retained Earnings 7 Balance Sheet 8 Summary . 12 Chapter 3 The Accounting Process 13 Journalize . 14 The Accounting Equation . . 15 Post . 17 Trial Balance . 19 Finding Errors . 20 Rest of the Process 24 Summary . 24 Chapter 4 Making the Entries . 25 Analogies to Personal Life . 26 Some Examples . 27 Summary . 29 Chapter 5 Assets . 30 v 10288$ CNTS 08-29-03 08:30:24 PS vi Contents Chapter 6 Cash 32 Petty Cash . . . 32 Bank Reconciliation . 34 Chapter 7 Accounts Receivable 41 Control Account/Subsidiary Ledger . 42 Bad Debts . . . 45 Direct Write-Off Method . 45 Allowance Method . . 46 Chapter 8 Inventory 52 Specific Identification . . 54 First-In, First-Out . 55 Last-In, First-Out 59 Weighted Average . 61 Things to Keep in Mind . 63 Chapter 9 Prepaid Expenses 66 Chapter 10 Other Receivables 68 Loan Term . . . 68 Interest . 69 Entries . 70 Chapter 11 Fixed Assets 72 Land 74 Land Improvements . 74 Leasehold Improvements 75 Buildings 75 Equipment and Machinery . 75 Furniture 75 Fixtures . 76 Vehicles . . 76 Depreciation . 76 Straight-Line Depreciation 76 Declining-Balance Depreciation 78 Partial-Year Depreciation 81 10288$ CNTS 08-29-03 08:30:24 PS vii Contents Retirement . 81 Asset Sale . 82 Chapter 12 Intangible Assets . 85 Chapter 13 Liabilities 89 Unearned Revenue . . . 90 Accrued Expenses 91 Chapter 14 Accounts Payable 92 Chapter 15 Other Payables 95 Interest Payable . 95 Rent Payable . 96 Taxes Payable 96 Salaries Payable . 97 Payroll Taxes Payable . . . . 97 Chapter 16 Stockholders’ Equity 99 Types of Stock 100 Common Stock 101 Recording the Issuance . 102 Treasury Stock 103 Dividends . 104 Chapter 17 Merchandising Companies . 107 Perpetual Inventory System . 111 Periodic Inventory System . 114 Discounts for Early Payment 115 Side-by-Side Comparison of the Periodic and Perpetual Systems 117 Chapter 18 Adjusting and Closing Entries 118 Payroll Accrual 119 Reversing Entries . 121 Interest Expense . 123 Unearned Revenue . . . 124 10288$ CNTS 08-29-03 08:30:25 PS viii Contents Prepaid Expenses . . . . 125 Closing Entry . 125 Chapter 19 Specialized Journals 129 Cash Receipts Journal . . 130 Cash Disbursements Journal 131 Purchases Journal . . . . 133 Sales Journal . 134 Payroll Journal 134 Chapter 20 Statement of Cash Flows . 136 Direct Method 138 Indirect Method . . . 139 Chapter 21 Ratio Analysis . 143 Horizontal and Vertical Analysis . 144 Ratio Analysis . 145 Liquidity Ratios . . . . 146 Efficiency Ratios . . . . 146 Profitability Ratios . 147 Summary . . . 149 Glossary 151 Index 167 10288$ CNTS 08-29-03 08:30:25 PS Acknowledgments I would like to thank my wonderful wife, Holly, and the great- est group of children any father could be blessed with: Jona- than, Amy, and Lauren. They were extremely understanding during the process of writing this book. I would also like to thank the team at AMACOM, especially Ray O’Connell and Jim Bessent, who made the development of this book painless. Finally, I would like to thank you, the reader, for your inter- est in financial accounting, without which this book would not be necessary. ix 10288$ $ACK 08-29-03 08:30:28 PS [...]... managerial accounting, cost accounting, and tax 1 2 Accounting Demystified accounting, to name a few These other types of accounting are covered in other books The end user of financial accounting is the public; therefore, financial accounting has a lot of rules These rules are necessary to make the information presented in the financial statements consistent and understandable In contrast, in managerial accounting, ... manner Financial accounting is an incremental process What you learn in earlier chapters is used in later ones There are no shortcuts to learning financial accounting, but at the same time, if it is taught clearly, it is not difficult Financial accounting involves all the steps from the original entries in the accounting records to the preparation of financial statements There are other types of accounting. .. financial accounting, the financial statements, then jump back to the first step in the accounting process, making journal entries This may seem out of order, but it follows the way accounting is best understood and learned rather than following the chronology of how accounting is done You cannot be a good accountant if you are not a good bookkeeper Bookkeeping is considered a lower-level profession than accounting, ... page intentionally left blank Accounting Demystified This page intentionally left blank C H A P T E R 1 Introduction The success or failure of a business is measured in dollars And dollars are recorded and reported using accounting Accounting is truly the language of business No matter what your role may be, if you are involved in business, you can benefit from learning accounting That’s what this book... Summary This chapter covered the end result of financial accounting, the preparation of financial statements Now we jump back to the beginning of the accounting process and look at how the information gets recorded in order to be available to be put on the financial statements C H A P T E R 3 The Accounting Process We started with the end product of the accounting process, the financial statements The steps... Cash (which will increase the balance of the Cash account) and a credit to The Accounting Process 15 Sales (which will increase the balance of the Sales account) How do we know when debits will increase or decrease an account? We know the effect debits and credits have from the accounting equation The Accounting Equation The accounting equation is the algebraic formula: Assets ‫ ס‬Liabilities ‫ ם‬Equity... possess skills that bookkeepers do not However, the first step in learning accounting is to learn bookkeeping What makes it accounting and not simply bookkeeping is going beyond just recording the entries into such areas as preparing the financial statements, analyzing the statements, and making necessary adjusting entries at the end of the accounting period A last thing to keep in mind when reading this book... statements Close These steps include some words we haven’t used before They will be explained later in the chapter 13 14 Accounting Demystified Journalize Journalizing is the process of taking transactions and turning them into a form (a journal entry) that can be captured by the financial accounting system Not everything that happens in the course of a business day requires that a journal entry be made If... on the Balance Sheet, the asset section total was equal to the sum of the liability and equity section totals This is the accounting equation From the Balance Sheet, we know that the components of equity are Common stock and Retained earnings Thus, we can replace equity in the accounting equation with Common stock and Retained earnings: Assets ‫ ס‬Liabilities ‫ ם‬Common stock ‫ ם‬Retained earnings... any account that has the word payable in its title will be a liability Any account that has the word expense in its title is likely to be classified as an expense on the Income Statement, except for 10 Accounting Demystified the account Prepaid expenses, which is an asset Any account with the word income or revenue in its title is classified as revenue on the Income Statement, except for the account Unearned