Financial Accounting11E by
STUART A MCCRARY
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Financial Accounting11E by
STUART A MCCRARY Free Download
Contents
Preface xi
Acknowledgments xiii
CHAPTER 1
Preface xi
Acknowledgments xiii
CHAPTER 1
Creating Ledger Accounting 1
Count Everything 4
The Beginnings of Double-Entry Accounting 5
Double-Entry Recording of Business Transactions 7
Handling Debits and Credits 7
Keeping Track of Data 9
A Mathematical Description of Double-Entry Conventions 10
Handling Income Items 11
Determining Profit in the Simple Accounting Model 11
Permanent Accounts Overview 11
Temporary Accounts Overview 12
Conclusion 12
Questions 13
CHAPTER 2
Accounting Conventions 15
Reasons Accountants Develop Conventions 15
Accounting Cycle 16
Classification 16
Comparability 16
Conservatism 16
Double-Entry 17
Full Disclosure 17
Focus on Addition 18
Generally Accepted Accounting Principles (GAAP) 18
Going-Concern Value 19
Journal Entry 19
Matching 20
vii
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Financial Accounting11E by
STUART A MCCRARY Free Download
Financial Accounting11E by
STUART A MCCRARY Free Download
THE BEGINNINGS OF
DOUBLE-ENTRY ACCOUNTING
If we count all the assets and liabilities, accountants can directly measure
the benefit of a transaction. Suppose a merchant sells myrrh that costs
5 gold coins in return for 10 gold coins. The currency account increases
by 10 gold coins (an asset), so our net worth increases by the same
10 gold coins. Our inventory of myrrh decreases by 5 gold coins, so the
net worth declines by 5 gold coins. The net of the two transactions
(which actually occur simultaneously) is to increase the firm equity by
5 gold coins.
Of course, as shown in Table 1.1, the imputed matching of transactions
with changes in equity is frequently not an actual accounting reality
but does offer a perspective on the link among assets, liabilities, and
DOUBLE-ENTRY ACCOUNTING
If we count all the assets and liabilities, accountants can directly measure
the benefit of a transaction. Suppose a merchant sells myrrh that costs
5 gold coins in return for 10 gold coins. The currency account increases
by 10 gold coins (an asset), so our net worth increases by the same
10 gold coins. Our inventory of myrrh decreases by 5 gold coins, so the
net worth declines by 5 gold coins. The net of the two transactions
(which actually occur simultaneously) is to increase the firm equity by
5 gold coins.
Of course, as shown in Table 1.1, the imputed matching of transactions
with changes in equity is frequently not an actual accounting reality
but does offer a perspective on the link among assets, liabilities, and
.
TABLE 1.2 Some Combinations of Business Transactions
Type of Transaction Offsetting Transaction Example
Increase asset Decrease a different asset Use cash to acquire an asset
Increase asset Decrease a different asset Sell used tools for cash
Increase liability Increase asset Borrow money to buy asset
Decrease liability Decrease asset Use cash to pay off a debt
Increase liability Decrease liability Issue bond to repay bank
loan
Type of Transaction Offsetting Transaction Example
Increase asset Decrease a different asset Use cash to acquire an asset
Increase asset Decrease a different asset Sell used tools for cash
Increase liability Increase asset Borrow money to buy asset
Decrease liability Decrease asset Use cash to pay off a debt
Increase liability Decrease liability Issue bond to repay bank
loan
equity. In the preceding sales transaction, it is also useful to think of the
mismatched change in assets (decrease in the value of myrrh in inventory
by 5 gold coins versus an increase in currency of 10 gold coins). It is no
accident that the mismatched change in assets exactly matches the
change in equity.
It will soon be obvious if we commit to count everything (including an
explicit account of the equity), that every counting transaction requires
at least two entries. In addition to the types of matched transactions in
Table 1.2, several other types of transactions are possible. Chapters 3
through 5 will describe these transactions.
Table 1.2 does not contain an exhaustive list of exchanges that are possible.
Also, the value of the two transactions does not always match, so
there can be a third or more entries required to describe a business transaction.
When the values of the transactions do not match, the increase or decrease
in the value of the firm absorbs the difference, as with the sale of
myrrh discussed earlier.
mismatched change in assets (decrease in the value of myrrh in inventory
by 5 gold coins versus an increase in currency of 10 gold coins). It is no
accident that the mismatched change in assets exactly matches the
change in equity.
It will soon be obvious if we commit to count everything (including an
explicit account of the equity), that every counting transaction requires
at least two entries. In addition to the types of matched transactions in
Table 1.2, several other types of transactions are possible. Chapters 3
through 5 will describe these transactions.
Table 1.2 does not contain an exhaustive list of exchanges that are possible.
Also, the value of the two transactions does not always match, so
there can be a third or more entries required to describe a business transaction.
When the values of the transactions do not match, the increase or decrease
in the value of the firm absorbs the difference, as with the sale of
myrrh discussed earlier.
Financial Accounting11E by
STUART A MCCRARY Free Download
Double-entry accounting merely recognizes that any need to count
some transaction in the business creates the need to count at least one additional
offsetting transaction. Further, if all the entries are matched with
entries to equity, the offsetting equity amount not only describes the net
benefit or detriment to the firm but also quantifies the net entry required to
complete the description of the transaction.
Note that modern accounting does follow the pattern of matching each
change in asset and liability with a change in equity but in a way that will be
described in Chapters 4 and 5. After we add a few more features to our
accounting system, the receipt of 10 gold coins will be instead matched
with an equal entry called SALES, and the reduction in inventory that cost
5 gold coins will be paired with a 5-gold-coin entry called COST OF
GOODS. These are called temporary accounts that will be netted and
reclassified as equity at some point in the future.
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Financial Accounting11E by
STUART A MCCRARY Free Download
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