Accounting

Peter J. Eisen

• Publisher: Barrons Educational Services
• Year: 2013
• ISBN:
  9781438092317
• Topic: Business
• Subtopic: Accounting
• Index: Business

Like the other titles in Barron's Business Review Series, the new sixth edition of Accounting makes a useful supplement to college textbooks, and is also excellent as a main text in business brush-up programs. Author Peter J. Eisen familiarizes students with key accounting terms, explains the accounting equation, and goes on to instruct in the use and preparation of financial statements, the recording of business transactions in journals, and in closing and adjusting entries at the end of a business period. The book is organized to closely follow a standard college textbook, but concentrates on student understanding of what is done, and, more importantly, how and why. Other helpful features include:

• Review questions
• Computational problems with complete detailed solutions presented when appropriate
• Additional problems to reinforce the reader's knowledge
• An extensive glossary of accounting terms.

New features in this edition include instruction in the use of spreadsheets to solve many accounting problems, a more detailed explanation of accounting data procedures as internal controls designed to safeguard assets, and extensive commentary on business ethics.

1
THE ACCOUNTING EQUATION

KEY TERMS

asset Anything that is owned and has money value.

capital The ownership of assets of a business by the proprietor(s).

expenses The costs of doing business, that is, the costs that must be incurred in order for an organization to generate revenue. A retail store must incur the expense of renting the store in order to operate the business.

liabilities Amounts due creditors and other interested parties; also, the ownership of certain assets of an organization by creditors. The ownership extends to the creditors’ right to collect what is due them before any distribution to the owners of the business.

revenue The receipt, from sales of a product or service, of assets such as cash or accounts receivable that will eventually have an effect on the owner’s equity.

THE ART OF ACCOUNTING

• WHAT IS ACCOUNTING?

Accounting is the art of organizing, maintaining, recording, and analyzing financial activities. Accounting is generally known as the “language of business.” The accountant translates this accounting information into meaningful terms that are used by interested parties. Every organization—profit, nonprofit, charitable, religious, or governmental—requires the services of accountants in providing accounting information.

• WHO USES ACCOUNTING INFORMATION?

Accounting information is used by everyone. The manager of an organization, who is charged with the responsibility of seeing that the enterprise is properly directed, relies upon the accounting information provided to make appropriate decisions. Investors in an enterprise need information about the financial status and future prospects of an organization. Bankers and suppliers grant loans and extend credit to organizations based on their financial soundness as evidenced by accounting information. Even customers and employees concerned about the condition of an organization make use of accounting information.

• WHAT INFORMATION DOES AN ACCOUNTANT GATHER?

The accountant keeps track of all business transactions. A business transaction is any business activity that affects what a business owns or owes, as well as the ownership of that business.

YOU SHOULD REMEMBER

Accounting is the art of organizing, maintaining, recording, and analyzing financial activities.

Accounting information is used by managers of all business organizations and in some cases by others who have an indirect financial interest in the business such as investors or creditors.

Business transactions represent economic events that affect the financial condition of the business.

WHAT ARE ASSETS?

The things that are owned by any business organization are known as assets. In order for an item to be considered an asset, it must meet two requirements: (1) it must be owned by the organization, and (2) it must have money value. Ownership is the exclusive right to possess, use, enjoy, and dispose of property. Money value exists if a buyer is willing to pay a sum of money to a seller for the property. Complete “Do You Know the Basics?” Exercises 1, 2, and 3.

• KEEPING TRACK OF ASSETS

Since there apparently are many different kinds of assets, how does the accountant keep track of all of the assets? The accountant does not keep track of all of them individually, but rather combines assets of a similar nature into common groups. For example, an individual or business organization may have such assets as coins, bills, money orders, and checks. These assets would be placed in a category or grouping known as cash. Thus, any money, regardless of its actual form, would be known and categorized as cash. Cash also includes money in bank accounts of the business organization that is available for payment of bills. It is the responsibility of the accountant to follow generally accepted accounting principles in placing individual assets in a specific and appropriate category. Complete “Do You Know the Basics?” Exercise 4.

• TYPES OF ASSETS

Assets may take many forms. While they may be grouped together into categories, as stated above, they may be considered to be tangible and intangible assets as well. A tangible asset is one that can be readily seen, and possibly touched, such as those previously illustrated and those in the first three categories listed below. They are physical assets. An intangible asset is without physical qualities, but has a value based on rights or privileges belonging to the owner. Two examples of intangible assets are patents and franchises.

The assets of an organization are usually divided into four categories: (1) current assets, (2) investments, (3) property, plant, and equipment, and (4) intangible assets.

Current assets are defined as cash and other assets that can reasonably be expected to be converted to cash, used up, or sold within 1 year or less. Examples of current assets include cash, accounts receivable (obligations due from customers), and supplies.

Investments are generally of a long-term nature, are not used in the normal operations of the organization, and are not expected to be converted to cash within the year. Examples of investments are stocks and bonds of other organizations.

Property, plant, and equipment are long-term or long-life assets that are used in the continuing operations of the organization and are expected to be used by the organization for more than a year. These kinds of assets are also known as plant assets or fixed assets. Examples of these assets are land, buildings, machinery, and equipment.

Intangible assets are usually of a long-term nature and have no physical substance but are of value to the owners of the organization. Examples of these assets are copyrights, goodwill, and trademarks. Complete “Do You Know the Basics?” Exercise 5.

YOU SHOULD REMEMBER

Assets represent anything that is owned and has money value.

Assets are organized into four groups: current assets; investments; property, plant, and equipment; and intangible assets.

• A COMMON WAY TO EXPRESS ASSETS

We have indicated that the accountant keeps track of all business transactions. So far, the only business transactions we have discussed are things that the organization owns, namely, assets. In order to keep track of these assets, there must be a common way of expressing them.

The common way of expressing the values of items in a business is known as the monetary principle. All business transactions are recorded in terms of money. Money is the only factor that is common to all assets, as well as to other items we will shortly be discussing. If we were to say that we have the asset “office supplies,” the accountant would express the ownership of this asset in terms of a money value assigned to it. The money value assigned would be based on what the office supplies cost when they were purchased. If we acquired office supplies that cost us $50, we would then say that the value of the asset office suppli...

Table of contents

• Cover Page
• Title Page
• 1 THE ACCOUNTING EQUATION
• 2 FINANCIAL STATEMENTS
• 3 RECORDING BUSINESS TRANSACTIONS
• 4 RECORDING ADJUSTING, CLOSING, AND REVERSING ENTRIES
• 5 A TRADING BUSINESS
• 6 SPECIAL JOURNALS AND CONTROLS
• 7 SAFEGUARDING CASH—SPECIAL CONTROLS
• 8 RECEIVABLES AND PAYABLES
• 9 LONG-LIFE AND INTANGIBLE ASSETS
• 10 INVENTORIES
• 11 PAYROLL
• 12 FINANCIAL STATEMENTS FOR PARTNERSHIP AND CORPORATE FORMS OF BUSINESS ORGANIZATIONS
• APPENDIX A
• ANSWERS