Wiley Pathways Small Business Accounting

PART I The Foundation of Accounting

CHAPTER 1. ACCOUNTING FOR YOUR BUSINESS 1

Introduction 2

1.1. Basic Accounting Concepts 2

1.1.1 Separate Entity Assumption 2

1.1.2 Accounting Period Assumption 3

1.1.3 Cash-Basis and Accrual Accounting 3

1.1.4 Internal Controls 5

Self-Check 6

1.2. Types of Businesses 6

1.2.1 Types of Business Operations 6

1.2.2 Legal Forms of Business Structure 7 Self-Check 12

1.3. Accounting Software Options 12

1.3.1 Overview of Software Options 13

1.3.2 Add-Ons and Fees 16

1.3.3 Setting Up Your Computerized Books 16

Self-Check 19

Summary 19

Assess Your Understanding 20

Be a Small Business Accountant 21

Key Terms 22

CHAPTER 2. MASTERING DEBITS AND CREDITS 23

Introduction 24

2.1 Differentiating Debits and Credits 24

2.1.1 Double-Entry Accounting 24

2.1.2 The Accounting Equation 25

2.1.3 The T-Account Tool 27

2.1.4 Analyzing Transactions 28

Self-Check 30

2.2 Overview of Financial Statements 30

2.2.1 The Balance Sheet 30

2.2.2 The Income Statement 32

Self-Check 32

2.3 The Chart of Accounts 33

2.3.1 Account Sections 33

2.3.2 Account Numbers 34

2.3.3 Managing an Efficient Chart of Accounts 35

Self-Check 37

Summary 37

Assess Your Understanding 38

Be a Small Business Accountant 41

Key Terms 42

CHAPTER 3. BEGINNING THE ACCOUNTING CYCLE 43

Introduction 44

3.1. Steps of the Accounting Cycle 44

3.1.1 Transactions 45

3.1.2 Journal Entries 45

3.1.3 Posting 45

3.1.4 Trial Balance 45

3.1.5 Worksheet 46

3.1.6 Adjusting Journal Entries 46

3.1.7 Financial Statements 46

3.1.8 Closing 46

Self-Check 47

3.2 Introduction to Journals and Ledgers 47

3.2.1 Journals 47

3.2.2 Ledgers 49

Self-Check 51

3.3 Keeping the Right Paperwork 51

3.3.1 Creating a Filing System 52

3.3.2 Figuring Out What to Keep and for How Long 53

Self-Check 55

Summary 55

Assess Your Understanding 57

Be a Small Business Accountant 58

Key Terms 59

PART II Accounting for a Service Business

CHAPTER 4. JOURNALIZING TRANSACTIONS 61

Introduction 62

4.1 Starting Your Business 62

4.1.1 Using the General Journal 62

4.1.2 Equity Transactions 64

Self-Check 68

4.2 Buying and Selling 69

4.2.1 Buying for the Business 69

4.2.2 Making the Sale 72

Self-Check 74

4.3 Other Transactions 74

4.3.1 Accounts Payable and Accounts Receivable 75

4.3.2 The Completed General Journal 75

Self-Check 77

Summary 77

Assess Your Understanding 78

Be a Small Business Accountant 80

Key Terms 81

CHAPTER 5. POSTING TRANSACTIONS AND PREPARING A TRIAL BALANCE 83

Introduction 84

5.1 Updating Ledger Accounts 84

5.1.1 The Ledger Account Form 84

5.1.2 Posting from the General Journal to the General Ledger 85

Self-Check 91

5.2 Maintaining the General Ledger 91

5.2.1 Calculating the Account Balances 91

5.2.2 Correcting Errors in a Manual System 92

Self-Check 93

5.3 Computerized Posting 94

5.3.1 Several Tasks at the Same Time 94

5.3.2 Researching Transactions 94

5.3.3 Correcting Transactions 95

Self-Check 97

5.4 Preparing the Trial Balance 97

5.4.1 Preparing a Manual Trial Balance 98

5.4.2 What to Do If You’re Out of Balance 100

5.4.3 Preparing a Trial Balance Using Software 100

5.4.4 Limitations of the Trial Balance 102

Self-Check 102

Summary 102

Assess Your Understanding 104

Be a Small Business Accountant 107

Key Terms 108

References 109

CHAPTER 6. ADJUSTMENTS AND THE WORKSHEET 111

Introduction 112

6.1 Setting Up the Worksheet 112

Self-Check 114

6.2 Calculating the Adjustments 114

6.2.1 Prepaid Expenses 115

6.2.2 Depreciation 116

6.2.3 Bad Debts 120

6.2.4 The Adjusted Trial Balance 122

Self-Check 124

6.3 Completing the Worksheet 125

6.3.1 Showing Net Income on the Worksheet 125

6.3.2 Journalizing and Posting the Adjustments 127

6.3.3 Replacing Worksheets with Computerized Reports 130

Self-Check 130

Summary 130

Assess Your Understanding 132

Be a Small Business Accountant 135

Key Terms 136

CHAPTER 7. FINANCIAL STATEMENTS AND THE CLOSING PROCESS 137

Introduction 138

7.1 The Income Statement 138

7.1.1 Preparing the Income Statement 138

7.1.2 Gaining Insight from an Income Statement 139

7.1.3 Analyzing the Income Statement 141

7.1.4 Using the Income Statement Data 142

Self-Check 143

7.2 The Balance Sheet 144

7.2.1 The Statement of Owner’s Equity 144

7.2.2 Preparing the Balance Sheet 146

7.2.3 Analyzing the Balance Sheet 147

Self-Check 152

7.3 The Closing Process 152

7.3.1 Permanent and Temporary Accounts 152

7.3.2 Closing the Temporary Accounts 153

7.3.3 Preparing a Postclosing Trial Balance 158

Self-Check 159

Summary 160

Assess Your Understanding 161

Be a Small Business Accountant 163

Key Terms 164

PART III Basic Accounting Procedures

CHAPTER 8. CASH, BANKING, AND INTERNAL CONTROLS 165

Introduction 166

8.1 Protecting against Internal Fraud 166

8.1.1 Types of Internal Fraud 166

8.1.2 Dividing Staff Responsibilities 168

8.1.3 Insuring Your Cash through Employee Bonding 170

8.1.4 Balancing Control Costs 170

Self-Check 171

8.2 Cash in the Bank 171

8.2.1 Checking Accounts 172

8.2.2 Savings Accounts 174

8.2.3 Bank Reconciliations 174

Self-Check 178

8.3 Cash on Hand 178

8.3.1 Petty Cash 179

8.3.2 Cash Registers 181

Self-Check 186

Summary 186

Assess Your Understanding 188

Be a Small Business Accountant 190

Key Terms 191

CHAPTER 9. EMPLOYEE PAYROLL AND DEDUCTIONS 193

Introduction 194

9.1 Staffing Your Business 194

9.1.1 Completing Government Forms 194

9.1.2 Picking Pay Periods 201

9.1.3 Determining Wage and Salary Types 202

Self-Check 204

9.2 Payroll Tax Withholdings 204

9.2.1 Social Security Tax 204

9.2.2 Medicare Tax 205

9.2.3 Federal Income Tax 205

9.2.4 State and Local Income Taxes 206

Self-Check 207

9.3 Employee Benefits 207

9.3.1 Tax-Exempt Benefits 207

9.3.2 Taxable Benefits 209

Self-Check 210

9.4 Payday 210

9.4.1 Calculating Gross Earnings 210

9.4.2 Calculating Net Pay 212

9.4.3 Recording the Payroll 213

9.4.4 Depositing Payroll Taxes 217

9.4.5 Outsourcing Payroll and Benefits Work 217

Self-Check 217

Summary 218

Assess Your Understanding 220

Be a Small Business Accountant 222

Key Terms 223

References 225

CHAPTER 10. UNDERSTANDING PAYROLL LEGALITIES 227

Introduction 228

10.1 Payroll Tax Deposits 228

10.1.1 When to Deposit Taxes 228

10.1.2 How to Deposit Taxes 230

10.1.3 Accounting for Tax Deposits 230

Self-Check 231

10.2 Payroll Tax Returns 231

10.2.1 Filing Form 941 231

10.2.2 Filing Form 940 235

Self-Check 240

10.3 Year-End Reporting 243

10.3.1 Filing the W-2 Forms 243

10.3.2 Filing the W-3 Form 247

Self-Check 249

10.4 Workers’ Compensation Insurance 249

Self-Check 252

10.5 Maintaining Employee Records 252

Self-Check 254

Summary 254

Assess Your Understanding 256

Be a Small Business Accountant 257

Key Terms 258

References 259

CHAPTER 11. SPECIAL JOURNALS: SALES AND CASH RECEIPTS 261

Introduction 262

11.1 Special Journals 262

11.1.1 Sales Journal 262

11.1.2 Cash Receipts Journal 264

Self-Check 271

11.2 Posting from Special Journals 271

11.2.1 Subsidiary Ledgers 271

11.2.2 Posting from the Sales Journal 272

11.2.3 Posting from the Cash Receipts Journal 275

Self-Check 278

11.3 Sales Returns and Allowances 278

11.3.1 Journalizing Sales Returns and Allowances 279

11.3.2 Posting Sales Returns and Allowances 279

Self-Check 281

11.4 Accounts Receivable Aging Summary 281

Self-Check 282

Summary 283

Assess Your Understanding 284

Be a Small Business Accountant 291

Key Terms 292

CHAPTER 12. SPECIAL JOURNALS: PURCHASES AND CASH DISBURSEMENTS 293

Introduction 294

12.1 Purchases Journal 294

12.1.1 Purchases Account 294

12.1.2 Parts of a Purchases Journal 295

Self-Check 296

12.2 Cash Disbursements Journal 296

12.2.1 Part of a Cash Disbursements Journal 296

12.2.2 Paying an Outstanding Bill 298

12.2.3 Paying Expenses 298

12.2.4 Paying Credit-Card Fees 299

12.2.5 Paying Loans and Interest 299

12.2.6 Paying Sales Tax 302

Self-Check 303

12.3 Posting Purchases and Cash Disbursements 303

12.3.1 Posting from the Purchases Journal 303

12.3.2 Posting from the Cash Disbursements Journal 306

Self-Check 308

12.4 Managing Accounts Payable 309

12.4.1 Purchases Returns and Allowances 309

12.4.2 Accounts Payable Aging Summary 310

Self-Check 311

Summary 311

Assess Your Understanding 312

Be a Small Business Accountant 316

Key Terms 317

PART IV Accounting for a Merchandising Business

CHAPTER 13. MERCHANDISE INVENTORY 319

Introduction 320

13.1 Cost of Goods Sold 320

13.1.1 Perpetual and Periodic Inventory 320

13.1.2 Net Purchases 322

13.1.3 Recording Initial Cost 323

Self-Check 328

13.2 Inventory Cost Flow 328

13.2.1 Determining the Value of Ending Inventory 329

13.2.2 Inventory Valuation Methods 329

13.2.3 Choosing the Best Method 331

13.2.4 Comparing the Methods 331

Self-Check 334

13.3 Lower of Cost or Market 334

Self-Check 335

Summary 336

Assess Your Understanding 337

Be a Small Business Accountant 340

Key Terms 341

References 343

CHAPTER 14. ADJUSTMENTS AND THE WORKSHEET FOR A MERCHANDISING BUSINESS 345

Introduction 346

14.1 Setting Up the Worksheet for a Merchandising Business 346

Self-Check 349

14.2 Inventory Adjustment 349

Self-Check 350

14.3 Adjustment to Record Expenses 350

14.3.1 Allowance for Bad Debt 351

14.3.2 Accrued Payroll Expenses 352

14.3.3 Depreciation Adjustment 354

14.3.4 Adjustment for Prepaid Expenses 354

Self-Check 356

Summary 356

Assess Your Understanding 358

Be a Small Business Accountant 361

Key Terms 362

CHAPTER 15. FINANCIAL STATEMENTS AND THE CLOSING PROCESS FOR A MERCHANDISING BUSINESS 363

Introduction 364

15.1 Financial Statements for a Merchandising Business 364

15.1.1 Income Statement 364

15.1.2 Statement of Owner’s Equity 367

15.1.3 Balance Sheet 369

Self-Check 370

15.2 Closing Entries for a Merchandising Business 371

Self-Check 374

15.3 Other Year-End Tasks: Form 1099 374

Self-Check 378

Summary 379

Assess Your Understanding 380

Be a Small Business Accountant 382

Key Terms 383

References 384

APPENDIX A: DEPRECIATION 385

A.1 Depreciation for Accounting Purposes 385

A.1.1 Knowing What You Can and Can’t Depreciate 385

A.1.2 Figuring Out the Useful Life of a Fixed Asset 386

A.1.3 Delving into Cost Basis 387

A.1.4 Depreciation Methods 387

A.1.5 Using QuickBooks to Calculate Depreciation 389

A.2 Depreciation for Income Tax Purposes 389

A.2.1 Section 179 389

A.2.2 MACRS 390

A.3 Setting Up Depreciation Schedules 390

A.4 Recording Depreciation Expenses 391

APPENDIX B: INCOME TAX 392

B.1 Tax Reporting for Sole Proprietors 392

B.2 Filing Tax Forms for Partnerships 392

B.3 Filing Tax Forms for Corporations 393

B.3.1 Reporting for an S Corporation 393

B.3.2 Reporting for a C Corporation 393

B.4 Tax Reporting for Limited Liability Companies 393

B.5 Professional Tax Services 393

Glossary 395

Index 407