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:

Unfinished Assignment Study Questions for Lesson 51

Lesson Objectives:

- The use of construction in process and billings on construction in process accounts
- Why the billings on CIP account is important
- How to create the journal entries for billing, collections and revenue transactions



In the previous lesson, we reviewed how to fill out the percentage of completion template in order to calculate the costs, percentage complete, revenue and gross profits figures for each year. We now will need to record journal entries for the billing, collections and revenue transactions that we calculated using the percentage of completion method.

There are two new accounts that we need to learn about when it comes to long term contracts, such as the government building example: construction in process and billings on construction in process.
 
- Construction in Process - This is an inventory account that defines the cost of the building activities. This account will also keep track of the gross profits based on the percentage of completion.
- Billings on Construction in Process - Also abbreviated as billings on CIP, this is a contra inventory account that decreases the construction in process account.



On the balance sheet, the contra inventory account of Billings on CIP will always be listed below the Construction in Process account. The purpose of this account is to balance out the asset listed on the balance sheet because technically the CIP account belongs to the customer and the company.

For example, if the Construction in Process amount on the balance sheet is $3,000,000, this would be considered an asset. Without the billings on CIP, it would appear that the company has an asset that gives them a future benefit which is not truly the case. The billings on CIP will net the gross profit figure that belongs to the company.



Now, let's proceed to creating the journal entries for the same example that we reviewed in the previous lesson. I have listed the completed template above that we will be referencing for the transaction amounts.

We will go ahead and walk through the journal entries step-by-step, starting with the costs.

1. Let's start with the journal entry for 2013 to report the assets. The cost incurred in this period will be debited for the amount of $2,500,000 against the CIP account. To pay for these costs, the company will need to credit the accounts payable or cash account for the same amount.
2. The next entry for 2013 will be for the accounts receivables which accounts for the billings to the customer. The accounts receivable would be debited by $2,000,000 and the billings on CIP would be credited by $2,000,000. The billings to the customer include the costs and the service that the company is providing.
3. The third entry will be for collections to account for the cash that has been collected for the year. This is a simple collections entry where we will debit the cash account and credit the accounts receivable to show that the funds have been collected.
4. The final entry will be to show the revenue and expense amounts. The construction expense account is debited by $2,500,000 and the revenue on the long term contract is recorded as a credit for $4,304,000. In order to balance out the transaction, the gross profit amount of $1,804,000 is recorded through the construction in process account for this entry.

We would then use the same process to record the journal entries for 2014 and 2015. As time goes on, you will get more familiar with these accounts and the types of entries that are required for long term contracts.