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www.downloadslide.com www.downloadslide.com www.downloadslide.com Accounting ALL-IN-ONE www.downloadslide.com www.downloadslide.com Accounting ALL-IN-ONE by Ken Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, and Jill Gilbert Welytok www.downloadslide.com Accounting All-In-One For Dummies® Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com Copyright © 2014 by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. 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Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print v ­ ersions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Control Number: 2013954224 ISBN 978-1-118-75800-7 (pbk); ISBN 978-1-118-81365-2 (ebk); ISBN 978-1-118-81374-4 (ebk) Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 www.downloadslide.com Contents at a Glance Introduction................................................................. 1 Book I: Setting Up Your Accounting System.................... 5 Chapter 1: Grasping Bookkeeping and Accounting Basics............................................ 7 Chapter 2: Outlining Your Financial Road Map with a Chart of Accounts................ 17 Chapter 3: Using Journal Entries and Ledgers.............................................................. 27 Chapter 4: Choosing an Accounting Method................................................................ 43 Book II: Recording Accounting Transactions................. 53 Chapter 1: Keeping the Books......................................................................................... 55 Chapter 2: Tracking Purchases....................................................................................... 67 Chapter 3: Counting Your Sales...................................................................................... 79 Chapter 4: Processing Employee Payroll and Benefits................................................ 91 Chapter 5: Computing and Reporting Payroll Taxes.................................................. 111 Book III: Adjusting and Closing Entries...................... 123 Chapter 1: Depreciating Your Assets........................................................................... 125 Chapter 2: Paying and Collecting Interest................................................................... 137 Chapter 3: Proving Out the Cash.................................................................................. 147 Chapter 4: Reconciling Accounts and Closing Journal Entries................................. 157 Chapter 5: Checking Your Accuracy............................................................................ 175 Chapter 6: Adjusting the Books.................................................................................... 185 Book IV: Preparing Income Statements and Balance Sheets......................................................... 195 Chapter 1: Brushing Up on Accounting Standards..................................................... 197 Chapter 2: Preparing an Income Statement and Considering Profit........................ 207 Chapter 3: Assessing the Balance Sheet's Asset Section........................................... 223 Chapter 4: Digging for Debt in the Balance Sheet’s Liabilities Section.................... 239 Chapter 5: Explaining Ownership in the Equit  y Section of the Balance Sheet........... 253 Chapter 6: Coupling the Income Statement and Balance Sheet................................ 265 www.downloadslide.com Book V: Reporting on Your Financial Statements......... 279 Chapter 1: Presenting Financial Condition and Business Valuation........................ 281 Chapter 2: Laying Out Cash Flows and Changes in Equity........................................ 291 Chapter 3: Analyzing Financial Statements................................................................. 305 Chapter 4: Reading Explanatory Notes and Disclosures........................................... 321 Chapter 5: Studying the Repor  t to the Shareholders................................................. 335 Book VI: Planning and Budgeting for Your Business.... 347 Chapter 1: Incorporating Your Business..................................................................... 349 Chapter 2: Choosing a Legal Structure for a Business............................................... 361 Chapter 3: Drawing Up a Business Plan to Secure Cash............................................ 371 Chapter 4: Budgeting for a Better Bottom Line.......................................................... 383 Chapter 5: Mastering and Flexing Your Budgeting..................................................... 395 Chapter 6: Planning for Long-Term Obligations......................................................... 407 Book VII: Making Savvy Business Decisions................ 419 Chapter 1: Estimating Costs with Job Costing............................................................ 421 Chapter 2: Performing Activity-Based Costing........................................................... 437 Chapter 3: Examining Contribution Margin................................................................. 453 Chapter 4: Accounting for Change with Variance Analysis....................................... 469 Chapter 5: Making Smart Pricing Decisions................................................................ 487 Book VIII: Handling Cash and Making Purchase Decisions................................................... 497 Chapter 1: Identifying Costs and Matching Costs with Revenue.............................. 499 Chapter 2: Exploring Inventory Cost Flow Assumptions........................................... 507 Chapter 3: Answering the Question: Should I Buy That?........................................... 519 Chapter 4: Knowing When to Use Debt to Finance Your Business.......................... 533 Chapter 5: Interpreting Your Financial Results as a Manager.................................. 547 Book IX: Auditing and Detecting Financial Fraud........ 555 Chapter 1: Mulling Over Sarbanes-Oxley Regulation................................................. 557 Chapter 2: Preventing Cash Losses from Embezzlement and Fraud....................... 571 Chapter 3: Assessing Audit Risk................................................................................... 585 Chapter 4: Collecting and Documenting Audit Evidence........................................... 607 Chapter 5: Auditing a Client’s Internal Controls......................................................... 625 Chapter 6: Getting to Know the Most Common Fraud Schemes.............................. 647 Chapter 7: Cooked Books: Finding Financial Statement Fraud................................. 663 Index....................................................................... 673 www.downloadslide.com Table of Contents Introduction.................................................................. 1 About This Book............................................................................................... 1 Foolish Assumptions........................................................................................ 2 Icons Used in This Book.................................................................................. 2 Beyond the Book.............................................................................................. 3 Where to Go from Here.................................................................................... 3 Book I: Setting Up Your Accounting System.................... 5 Chapter 1: Grasping Bookkeeping and Accounting Basics . . . . . . . . . 7 Knowing What Bookkeeping and Accounting Are All About...................... 8 Distinguishing between bookkeeping and accounting...................... 8 Taking a panoramic view of bookkeeping and accounting............... 9 Wrapping Your Brain around the Accounting Cycle................................. 10 Working the Fundamental Accounting Equation........................................ 14 Chapter 2: Outlining Your Financial Road Map with a Chart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Getting to Know the Chart of Accounts....................................................... 17 Connecting the chart of accounts to financial statements.............. 18 Organizing the accounts...................................................................... 18 Balancing transactions......................................................................... 19 Setting Up Your Chart of Accounts.............................................................. 20 Mulling Over Debits versus Credits............................................................. 21 Understanding Double-Entry Accounting.................................................... 22 Revisiting the balance sheet equation............................................... 22 Recording journal entries.................................................................... 22 Figuring out a complex journal entry................................................. 24 Chapter 3: Using Journal Entries and Ledgers . . . . . . . . . . . . . . . . . . . . 27 Keeping a Journal........................................................................................... 27 Using journals to record cash transactions...................................... 28 Recording accrual transactions.......................................................... 31 Exploring other journals...................................................................... 33 Checking out examples of common journal entries......................... 35 Bringing It All Together in the Ledger......................................................... 37 Realizing what a ledger is.................................................................... 37 Posting to the ledgers.......................................................................... 38 www.downloadslide.com viii Accounting All-In-One For Dummies Viewing an example of a general ledger............................................. 38 Recognizing the purpose of the trial balance................................... 39 Putting Accounting Software to Work for You............................................ 40 Chapter 4: Choosing an Accounting Method . . . . . . . . . . . . . . . . . . . . . 43 Distinguishing between Cash and Accrual Basis........................................ 43 The cash basis....................................................................................... 44 The accrual basis.................................................................................. 45 Sorting through Standards for Other Types of Accounting...................... 46 Managerial accounting......................................................................... 47 Not-for-profit accounting..................................................................... 47 Governmental accounting................................................................... 48 International accounting...................................................................... 49 Considering the Conceptual Framework of Financial Accounting........... 49 The objective of financial reporting................................................... 50 Characteristics of accounting information........................................ 50 Elements of the financial statements................................................. 51 Financial statement measurements.................................................... 52 Book II: Recording Accounting Transactions.................. 53 Chapter 1: Keeping the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Analyzing the Effect of Business Transactions........................................... 55 Revisiting the fundamental accounting equation............................. 56 Getting familiar with accounts............................................................ 56 Defining debits and credits.................................................................. 57 Knowing more about the transaction methodology........................ 57 Managing Your Bookkeeping and Accounting System.............................. 58 Categorizing your financial information: The chart of accounts......................................................................................... 58 Standardizing source document forms and processing procedures............................................................. 59 Hiring competent personnel................................................................ 60 Enforcing strong internal controls..................................................... 62 Wrapping Up with End-of-Period Procedures............................................. 63 Tidying up the books............................................................................ 63 Leaving good audit trails..................................................................... 64 Staying alert for unusual events and developments........................ 64 Designing truly useful reports for managers..................................... 65 Chapter 2: Tracking Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Keeping Track of Inventory........................................................................... 68 Entering initial cost.............................................................................. 69 Managing inventory and its value....................................................... 71