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:

- Differences between the periodic and perpetual inventory system
- Recording purchases and returns
- Journalizing shipping costs and discounts



Here are two important differences between the periodic inventory system and the perpetual inventory system:
1. There will be no merchandise inventory account since the company is not using a system to track the inventory balances. This is because the merchandise is counted at the end of the accounting period.
2. Since we are not tracking every merchandise transaction, there will not be a cost of goods sold for each transaction.



Let's say the company is using a periodic inventory system and makes a purchase for $5,000. We first have the purchases account, which is considered an asset, that is increasing, therefore it will be debited by the $5,000. Accounts payable is a liability that is also increasing, and would be credited by the same amount.
 
If the purchase is made on 2/10, net 30 terms, this means that a 2 percent discount is offered if payment is made within 10 days. Otherwise, the company is due to pay the full amount within 30 days.



If the company is paying for the shipping costs on their purchase, they would need to record a journal entry for the transaction. Since we are not using the merchandise inventory account to track the inventory changes, the shipping costs would be recorded using the freight in and cash accounts.
 
Freight in is the expense that the company must pay for shipping and falls under the expense category, so it would be debited for $120. They are paying cash for the shipping costs, which means the cash would need to be credited. This would be the case of FOB shipping, while there would be no journal entry for FOB destination.



You can think of purchase returns as the opposite of purchases, as the merchandise is being returned to the seller. If the company is returning $650 worth of merchandise, accounts payable would need to be debited for that amount because it is a liability that is decreasing. The purchase returns and allowances account would be the contra account that is credited by $650 to balance out the double entry.



The final type of purchase transaction in the periodic inventory system is discounts. Accounts payable would be decreasing because it is being paid off and since it is a liability, it would be debited by $4,350 since $650 worth of merchandise was returned out of the original $5,000 total.
 
If the discount was 2 percent for issuing payment within 10 days, the company would pay $4,263 in cash and the purchase discount would be $87. Both accounts would need to be credited.

Many of these accounts such as purchase returns & allowances and purchase discounts will come up in future lessons when we are reviewing the multiple-step income statement preparation again for periodic inventory.