Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Sale transaction types
- Recording journal entries for sales and shipping costs.
- Journalizing sales returns and discounts.



In the previous lesson, we covered inventory purchase transactions that are recorded using the merchandise inventory account. The next type of account that will come up related to sales transactions in the perpetual inventory system is the cost of goods sold. The cost of goods sold, also referred to as COGS represents the expense for the amount of goods sold.

In this lesson we will be covering four different types of sales transactions including the sale of inventory, shipping costs, sales returns and discounts.
 
- Sale of Inventory: This is the most common sales transaction when the company sells merchandise to customers.
- Shipping Costs: Either the purchaser or seller pays a shipping carrier for product delivery.
- Sales Returns: Customers return merchandise for defects, issues or missing pieces.
- Discounts: The company offers discounts for bulk or advanced payment.



Let's say we are selling goods for $8,000 and offer a discount to the customer of 2 percent if they pay the balance within 10 days, otherwise they will pay the full price. This discount would be formatted as 2/10, n/30.
 
This transaction would be fairly simple as we are increasing the accounts receivable and since it is an asset, it will be debited for $8,000. The sales account is also increasing but would be a credit entry since it is on the equity side. The first journal entry above would represent the revenue that is generated from the sale.
 
The next journal entry would represent the expense related to the sale; the cost of goods sold would be debited and the merchandise inventory would be credited. The reason for the second entry is due to the matching principle that requires the revenue to be matched to the expenses incurred.



The second type of journal entry for sales has the same two types of FOB destination and FOB shipping that we talked about when reviewing purchase transactions. Although in this case, the company is the seller of the goods.
 
For FOB destination, the company is paying for shipping costs as the seller. They would need to record the freight out expense and cash paid for the shipping. If they paid $60 for shipping, the freight out would be debited and cash would be credited as shown in the journal entry above. In contrast, there will be no entry if the purchaser pays for the shipping with FOB shipping terms.



When the company has merchandise being returned, they will need to reduce their sales accounts. In order to record this type of transaction, we first need to debit sales returns and credit accounts receivable for the amount of the sale being returned.
 
The second entry would reflect the merchandise coming back to the inventory and the cost of goods sold. The merchandise inventory is an asset that is increasing so it would be debited and the cost of goods sold would be credited.



The final type of sales transaction that we will go over is discounts when the company offers a percentage or amount off for bulk or advanced purchases. First, we would record the sales transaction and cost of goods sold transaction assuming nothing was returned.

Next, we would record the journal entries for the discount. Since we are offering a 2 percent discount for cash payment within 10 days, we would record the receipt of cash as a debit for $7,840 and credit accounts receivable for the full price of $8,000.
 
For the contra sales account, we would need to record the sales discount as a debit of $160. The sales account is being reduced in this case because of the discount.

Now that you've learned how to record the different sales transactions, we will be reviewing how to prepare a multi-step income statement in the next lesson.