BUSINESS BOOKS. Accounting SIXTH EDITION. Peter J. Eisen Assistant Principal Retired Accounting & Business Practice N.YC. Department of Education

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1 BUSINESS BOOKS Accounting SIXTH EDITION Peter J. Eisen Assistant Principal Retired Accounting & Business Practice N.YC. Department of Education BARRON'S

2 CONTENTS Preface ix 1 THE ACCOUNTING EQUATION I The Art of Accounting 1 What Is Accounting? 1 Who Uses Accounting Information? 1 What Information Does an Accountant Gather? 2 What Are Assets? 2 Keeping Track of Assets 2 Types of Assets 3 A Common Way to Express Assets 4 Determining the Money Value of Assets 4 Basic Business Organization Forms 4 How Is the Proprietor's Ownership Expressed? -5 Proprietor's Contributions 5 Assets = Capital 6 How Are Borrowed Assets Expressed? 6 Expressing Borrowed Assets 6 The Accounting Equation 7 What Are Revenue, Expenses, and Profit? 8 Recording Revenue 8 Recording Expenses 9 How Revenue and Expenses Affect Capital 9 KNOW THE CONCEPTS 11 PRACTICAL APPLICATION 13 ANSWERS 19 2 FINANCIAL STATEMENTS 24 What Are Financial Statements? 24 The Income Statement 25 The Statement of Capital 27 The Balance Sheet 28 The Report and Account Forms 30 The Classified Balance Sheet 31 KNOW THE CONCEPTS 34 PRACTICAL APPLICATION 35 ANSWERS 38 3 RECORDING BUSINESS TRANSACTIONS 47 What Are Business Transactions? 47 Information to Keep Track Of 48 Changes Resulting from a Business Transaction 48 Where to Record Business Transactions 48 The Account 49 The Standard Form of the Ledger Account 49

3 iv CONTENTS Making Entries in Ledger Accounts 49 Recording Asset Changes 51 Recording Changes in Liability and Permanent Capital Accounts 52 Analyzing Business Transactions 53 Recording Transactions in Temporary Capital Accounts 54 The Rule of Double-Entry Accounting 55 Standard Form for the Ledger Account 56 Other Forms of the Ledger Account 57 Proving the Accuracy of Recorded Transactions 58 The Journal 60 The Purpose and Form of the Journal 60 Recording Business Transactions in the Journal 61 Recording Transactions in Both Journal and Ledger 62 Transferring Transactions from the Journal to the Ledger 64 Verifying Ledger Balances 67 KNOW THE CONCEPTS 69 PRACTICA! APPLICATION 70 ANSWERS 77 4 RECORDING ADJUSTING, CLOSING, AND REVERSING ENTRIES 89 Adjusting Entries 89 Types of Adjusting Entries 90 Accruals 90 Accrued Expenses 91 Accrued Revenue 92 Deferrals 94 Deferred Expenses 94 Deferred Revenue 96 Adjusting Noncurrent Assets 98 What Is Depreciation? 98 Preparing the Worksheet 100 How to Record Adjustments on the Worksheet 102 Using the Completed Worksheet 103 Closing Entries 105 Eliminating the Temporary Account Balances 105 Using the Income Summary Account 105 Post-Closing Trial Balance 108 Verifying the Ledger After Closing 108 Steps in the Accounting Cycle 109 Reversing Entries 109 The Need for Reversing Entries 110 When to Use Reversing Entries 112 KNOW THE CONCEPTS 114

4 CONTENTS v PRACTICAL APPLICATION ANSWERS 5 A TRADING BUSINESS How Service and Trading Businesses Differ Special Accounts for a Trading Business Methods of Determining Income Determining Net Sales Recording Sales, and Sales Returns and Allowances Recording Sales Discounts Determining the Cost of Goods Available for Sale Determining Net Purchases Determining the Merchandise Inventory Determining the Cost of Merchandise Sold Recording Daily Business Transactions Adjusting and Closing Entries Converting Beginning Inventory to an Expense Establishing Ending Inventory Preparing a Wörksheet Reversing Entries KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS 6 SPECIAL JOURNALS AND CONTROLS What Are Special Journals? Kinds of Special Journals Sales Journal Cash Receipts Journal Purchases Journal Cash Payments Journal Bracket Entries Other Special Journals KNOW THE CONCEPTS PRACTICAL APPLICATION ANSWERS 7 SAFEGUARDING CASH SPECIAL CONTROLS Internal Control Special Controls to Safeguard Cash Bank Reconciliation Statement Recording Adjusting Entries Petty Cash Fund Voucher System KNOW THE CONCEPTS

5 vi CONTENTS PRACTICAL APPLICATION 232 ANSWERS RECEIVABLES AND PAYABLES 246 Seliing Goods and Services 246 Recognizing Bad Debts 247 Direct "Write-off Method 248 Net Sales Method 249 Aging of Accounts Receivable Method 251 Extending Credit 253 Promissor^ Notes 253 Interest-Bearing Promissory Notes 255 Transferring Notes 260 KNOW THE CONCEPTS 266 PRACTICAL APPLICATION 267 ANSWERS LONG-LIFE AND INTANGIBLE ASSETS 281 Long-Life Assets 281 Using Long-Life Assets 281 Determining Plant and Equipment Costs 282 Allocating Plant and Equipment Costs 283 Depreciation 284 Recording Depreciation for Federal Income Tax Purposes 294 Disposal of Plant Assets 295 Depletion 298 Intangible Assets 300 Amortization 300 Capital Improvements 302 KNOW THE CONCEPTS 303 PRACTICAL APPLICATION 304 ANSWERS INVENTORIES 315 What Is Merchandise Inventory? 315 Inventories and the Trading Business 316 Errors in Valuing Merchandise Inventories 316 Types of Inventory Systems 319 Determining the Cost of Inventories 323 The FIFO Method 323 The LIFO Method 324 The Weighted Average Method 325 Recognizing Significant Changes in Inventory Value 327 Estimating Inventory Value 328 The Gross Profit Method 328

6 CONTENTS vii The Retail Method 329 KNOW THE CONCEPTS 331 PRACTICAL APPLICATION 333 ANSWERS PAYROLL 342 What Is Payroll? 342 Payroll Deductions 343 Social Security Tax 344 Federal Income Tax 346 State and Local Taxes 364 Disability Insurance Taxes 364 The Payroll Register 365 The Employee Earnings Record 366 Payroll and Government Regulations 369 Unemployment Compensation Taxes 370 Calculating Employee Earnings 371 The W-2 Form 373 KNOW THE CONCEPTS 374 PRACTICAL APPLICATION 375 ANSWERS FINANCIAL STATEMENTS FOR PARTNERSHIP AND CORPORATE FORMS OF BUSINESS ORGANIZATION 385 Forms of Business Organizations 386 The Partnership 386 Characteristics of the Partnership 386 Advantages and Disadvantages of the Partnership 388 The Partnership Capital and Drawing Accounts 389 Financial Statements of a Partnership 392 The Corporation 393 Characteristics of the Corporation 394 Advantages and Disadvantages of the Corporation 395 Corporate Capital 396 Types of Stock 397 Recording Stock Transactions 401 Financial Statements for a Corporation 405 KNOW THE CONCEPTS 407 PRACTICAL APPLICATION 409 ANSWERS 413 APPENDIX A Statement of Cash Flows

7 viii CONTENTS APPENDIX B 422 Accounting and the Microcomputer 422 Electronic Spreadsheet 423 Data Base 424 Word Processor 425 Graphics 425 Networking and the Internet (World Wide Web) 426 GLOSSARY 428 INDEX 442