Accounting Demystified

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Accounting

Transcript of Accounting Demystified

Accounting

Demystified

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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.

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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

657dc22

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

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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

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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

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Contents

vii

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

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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

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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 OConnell 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

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Accounting

Demystified

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1

CHAPTER

Introduction

The success or failure of a business is measured in dollars. And

dollars are recorded and reported using accounting. Account-

ing 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. Thats what this book is all abouttaking

the subject and making it understandable and accessible.

This book makes an excellent companion to any standard

text, or it can be used as a stand-alone volume. It is designed

to present the subject in a straightforward, approachable man-

ner. Financial accounting is an incremental process. What