College Accounting, Chapters 1-12

650 Pages·2012·23.87 MB·English

by  Tracie L. Nobles

CHE-NOBLES-11-0409-Intro.indd 11 01/12/11 7:19 PM
College
Accounting
Chapters 1–12 11e
Tracie L. Nobles, CPA
Austin Community College
Cathy J. Scott
Navarro College
Douglas J. McQuaig
Wenatchee Valley College, Emeritus
Patricia A. Bille
Wenatchee Valley College
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College Accounting, Chapters 1–12 © 2013, 2011 South-Western, Cengage Learning
Eleventh Edition
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may
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1 2 3 4 5 6 7 15 14 13 12
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CHE-NOBLES-11-0409-Intro.indd 11 01/12/11 7:19 PM
Abou t th e Au tho rs
Tracie L. Nobles
Tracie L. Nobles, CPA, received her bachelor’s and master’s degrees in
accounting from Texas A&M University. She has served as Department
Chair of the Accounting, Business, Computer Information Systems,
and Marketing/Management Department at Aims Community College,
Greeley, Colorado, and is currently an Associate Professor of Accounting
at Austin Community College, Austin, Texas. Professor Nobles has public
accounting experience with Deloitte Tax LLP and Sample & Bailey, CPAs.
She is a recipient of the Aims Community College Excellence in Teaching
Award. Professor Nobles is a member of the Teachers of Accounting at
Two-Year Colleges, the American Accounting Association, the American
Institute of Certified Public Accountants, and the Texas Community
College Teachers Association. She is currently serving as secretary/
webmaster of Teachers of Accounting at Two-Year Colleges, as a member of the American Institute of Certified
Public Accountants Pre-certification Education Executive Committee, as co-chair for the Conference on Teaching
and Learning Accounting and as Two-Year College Section chair for the American Accounting Association.
Professor Nobles has spoken on such topics as creating online web videos, motivating nonbusiness majors to learn
accounting, and incorporating small business topics in college accounting at numerous conferences, including the
Teachers of Accounting at Two-Year Colleges and the American Accounting Association. In her spare time, she
enjoys camping and fishing with her husband, Trey, and spending time with her family and friends.
Cathy J. Scott
Cathy J. Scott is currently an Associate Professor of Accounting and
the Department Chair for Accounting, Business and Economics, at
Navarro College. She is a proud recipient of Navarro College’s Teaching
of Excellence Award. Professor Scott received her bachelor’s degree from
Nazareth College, MBA from Amberton University, a post-graduate
Accounting degree from Keller Graduate School of Management, and
is currently ABD in her PhD program at Capella University. Professor
Scott made a career shift into academics after a 25-year accounting and
consulting career within the automotive industry. She has been a popular
seminar speaker in the area of accounting and financial management for
Automotive and Recreational Vehicle manufacturers, as well as dealer
associations. She has also written numerous accounting related articles
for various automotive publications. Professor Scott is a member of the
Institute of Management Accountants, Teachers of Accounting at Two-Year Colleges, the American Accounting
Association, and the Texas Community College Association. Professor Scott is currently the Southwest Regional
Section Coordinator for Two-Year Colleges and for several years has been either the Chair and/or Co-chair for
the Accounting section of the Texas Community College Association. In recent years, Professor Scott has become
interested in improving online accounting education and has spoken on numerous occasions about effective online
learning techniques and innovative technology in the area of accounting. In her free time, Professor Scott enjoys
spending time with her family on her farm in North Texas, in addition to raising and showing her Arabian horses.
iii
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Pre face
College Accounting is a course for the times. The practical concepts and skills students take away from the College
Accounting course have the power to launch new careers and bright futures. Students of College Accounting have
many different goals: to train for accounting careers; to develop skills that lend themselves to technical, managerial,
and executive positions; or to go on and earn Accounting or Business degrees. College Accounting 11e, maintains
its dedicated emphasis on the significance of the College Accounting course as a launching pad for students’ future
classes, jobs, and careers. Like the previous editions, College Accounting, 11e provides an approach that builds
students’ business skills, accounting expertise, and confidence.
Accounting concepts and exercises are offered rin a real-world context that encourages students to regard their
e
coursework as true groundwork for their future classptes, jobs, and careers. This edition builds student skills in the areas of
a
accounting knowledge, technology, ethics, communication, and critical thinking—providing students with skills needed
7h
to be successful in life and work. c
Employee Earnings
connecting the classroom to the reaal nwdo rDldeductions
With a focus on small business, College
Accounting, 11e provides real-world context
Learning Objectives
that keeps chapter content relevant and To: Amy Roberts, CPA
Cc:
vital. These are some of the activities that After you have completed Bcc:
this chapter, you will be able Subject: Employee Earnings and Deductions
are designed to build student skills in the to do the following:
Hi Amy,
areas of accounting knowledge, technology,
1 Recognize the role of Thanks for all of your help with setting up my accounting system. Now I
ethics, communication, and critical income tax laws that need some guidance on how to calculate and account for earnings, payroll
affect payroll deductions taxes, and any other important deductions. I’ve been told that handling
thinking. and contributions. payroll in a timely and accurate manner is extremely important. Therefore,
2 Calculate total earnings I want to make sure I know what to do. What do I need to know to calculate
based on an hourly, employee earnings and deductions?
salary, piece-rate, or Thanks,
commission basis. Janie
Chapter Email Openers
3 Determine deductions
from gross pay, such To: Janie Conner
Every chapters begins with an email opener as federal income tax Cc:
withheld, Social Security Bcc:
that simulates a mentor relationship tax, and Medicare tax, Subject: RE: Employee Earnings and Deductions
to calculate net pay.
bThetewsee enem aa ilsst usdeetn tt haen ds tahgeer fCorP Aw hfryi enthde. 4 Creogmispteler.te a payroll HYoi uJ aanriee ,right. Handling payroll in a timely and accurate manner is extremely
important to your employees and your company. To gain an accurate
chapter content is important and provides 5 Jeonutrryn afrloizme tah ep apyaroyrlol ll understandin g1 .o Wf phaaytr toallx, ylaowus'l l anfefeecdt ptoa ykrnoollw d tehdeu fcotilolonwsi nagn:d contributions
register.
a checklist of what students need to know 2. How to calculate total earnings based on hourly, salary,
6 Maintain employees’ piece-rate, or commission basis
from each chapter to succeed. individual earnings 3. How to determine deductions and net pay
records. 4. How to set up and use a payroll register
5. How to journalize payroll entries
Accounting in Your Future 6. How to maintain individual employee earnings records
Give me a call tomorrow and we can set up a meeting to discuss these
items further.
This feature provides insight into possible Amy
careers that use accounting knowledge. This
feature is designed to encourage students to
CHE-NOBLES-11-0409-007.indd 294 17/11/11 12:13 PM
think about their futures in accounting.
iv
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304 Part 2: Accounting for Cash and Payroll
Employees’ State Income Tax Withholding
Many states that levy state income taxes also furnish employers with withholding tables.
Other states use a fixed percentage of the federal income tax withholding as the amount
to be withheld for state taxes. In our illustration, we assume that the amount of each
employee’s state income tax deduction is 20 percent (0.20) of that employee’s federal
income tax deduction.
Employees’ FICA Taxes Withholding
(Social Security and Medicare)
The Federal Insurance Contributions Act provides for retirement pensions after a
worker reaches age 62, disability benefits for any worker who becomes disabled (and for
her or his dependents), and a health insurance program after age 65 (Medicare). Both
FYI
the employee and the employer must pay FICA taxes, which are commonly referred to
as Social Security taxes and Medicare taxes. The employer withholds FICA taxes from
At one time, Social employees’ wages and pays them to the U.S. Treasury.
Security and Medicare FICA tax rates apply to the gross earnings of an employee during the calendar year.
were not separated for After an employee has paid Social Security tax on the maximum taxable earnings,
tax computation and the employer stops deducting Social Security tax until the next calendar year begins.
there was a limit on Congress has frequently changed the schedule of rates and taxable incomes.
Medicare taxable As explained earlier, in this text, we assume a Social Security rate of 4.2 percent
earnings. Now all (0.042) of the first $106,800 for each employee and a Medicare rate of 1.45 percent
earnings are taxable for (0.0145) of all earnings for each employee. Both tax rates apply to earnings during the
Medicare.
calendar year. (Tables for Social Security and Medicare tax withholdings are available in
Preface the Internal Revenue Service Publication 15-T.) v
ACCOUNTING in youR FutuRe
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Whitewater Raft Supply made money on the deal. If the amount of the proceeds is less
receive compensation and benefits critical to maintaining a
than the principal, on the other hand, the deficiency represents Interest Expense because
productive and motivated workforce. Some payroll departments
Whitewater Raft Supply lost money in the deal.
work closely with Information Technology, Human Resources,
step 5an. dR oetchoerrd d tehpea retnmteryn.t sL otoo ke nast uthree tehnattr yth ine cWohmitpeawnayt’esr pRaayfrto Sll uisp ply’s general
accjuoruartnea, li.s up-to-date, and is serving the company’s current
business objectives. For these reasons, it is important to
understand how payroll is determined, whether you are
directly responsible for processing payrolPl oosrt. you are employed
Datien another busineDsses dcreipptiaonrtment. Ref. Debit Credit
20—
May 5 Cash 1 8 0 1 39
Notes Receivable 1 8 0 0 00
Interest Income 1 39
Discounted at the bank Bowers River
Co.’s note, dated April 20. The bank
discount rate is 6 percent.
You Make the Call
CHE-NOBLES-11-0409-007.indd 304 A DiscOunteD nOte: exAmpLe 2 16/11/11 4:14 PM
These features sharpen critical-thinkinOg na Anpdril 2p4r, oWbhlietemwa-tesro Rlvaftin Sugp pslky irlelcse ivbedy a p90la-dcaiyn, 5g.5 tpherec enstt,u $d2,e50n0t n ointe, daa trede alistic accounting
April 24, from L. R. Ray. On May 4, Whitewater Raft Supply discounted the note at New
dilemma. These exercises provide students with the opportunity to apply their knowledge of individual topics within the
National Bank. The discount rate charged by the bank is 6.5 percent.
chapter. Each scenario is followed by a detailed, clearly explained solution.
yOu Make the Call
You are the owner of a small business whose sOLutiOn
balance sheet assets include Accounts Included in your current assets are notes
Receivable, Notes Receivable, Merchandise receivable—promises to pay you money but
Inventory, Prepaid Insurance, and Office in future payments at a particular interest
Equipment. You find that you are having rate. At this point, you may choose not to
increasing difficulty meeting the payroll as wait for those payments to be received. In
well as being unable to do any business fact, if they are current notes receivable, you
expansion. In other words, your cash flow may be able to sell all or part of them to a
and your working capital are stifling your bank or finance company for a percentage
ability to meet payable demands and to plan of their future value and receive the cash
for the growth of your business. How might immediately.
you make your assets work for you to begin
to solve your cash flow and woChrkAPinTEgR c5apital
CloSing EnTRiES And ThE PoST-CloSing TRiAl BAlAnCE 209
shortfalls?
In this case, the accountant would prepare a work sheet at the end of each month. Next,
based on these work sheets, he or she would journalize and post the adjusting entries and
prepare the financial statements. However, the remaining steps—closing entries and the
post-closing trial balance—would be performed only at the end of the year.
In the Real World
In the Real World
This new fCeHaE-NtOuBrLEeS- 11a-0p40p9-0e14a.inrdds 62i0n every chapter and 11/11/11 2:22 PM
provides real-world facts about companies with
Publicly traded corporations such as Electronic Arts,
which students are familiar. These features are Inc., a leading video game publisher, are required
rreelaalt-ewdo rtlod tinhteo cthhaep ctlears smroaotmer.i al and bring the Suzi Altman/ZUMA/Corbis tfippsotnroae asfitsienlteemicno iitanen ln tt ohesttfsera i tmatqheru eemfia csnreiotamnerntprisclloya iaa rr( ralet etsov itofi eatnlrhteye.ed mT t ahuhenrseneni nteiusng .amt elFT orfiohinmnremtas henfi s1 cni)n0i aafit-nlenQ craii manalcn ida l
statements but are not as detailed and are typically
not verified by an auditor.
Chapter Review
Study and Practice
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1 List the steps in the accounting cycle. Learning Objective
STEP 1. Analyze source documents and record business transactions in a journal. C
STEP 2. Post journal entries to the accounts in the ledger. HA
STEP 3. Prepare a trial balance. PT
STEP 4. Gather adjustment data and record the adjusting entries on a work sheet. ER
STEP 5. Complete the work sheet. R
E
STEP 6. Journalize and post the adjusting entries from the data on the work sheet. V
STEP 7. Prepare financial statements from the data on the work sheet. IEW
STEP 8. Journalize and post the closing entries.
STEP 9. Prepare a post-closing trial balance.
1 PRACTICE EXERCISE 1
Match the steps of the accounting cycle to their corresponding number.
1. Step 1 a. Journalize and post the closing entries.
2. Step 2 b. Prepare a trial balance.
3. Step 3 c. Analyze source documents and record business transactions in a
4. Step 4 journal.
(Continued)
CHE-NOBLES-11-0409-005.indd 209 16/11/11 5:00 PM
206 Part 1: The Accounting Cycle for a Service Business: Analyzing Business Transactions
Notice that the nominal, or temporary-equity, accounts (revenue, expenses, Income
Summary, and Drawing), which are closed at the end of each fi scal period, are not shown
on the post-closing trial balance. Th ese accounts are not shown because they have zero
balances.
If the total debits and total credits of the post-closing trial balance are not equal, here’s
a recommended procedure for tracking down the error.
1. Re-add the trial balance columns.
2. C heck that the fi gures were correctly transferred from the ledger accounts to the
post-closing trial balance.
3. Verify the posting of the adjusting entries and the recording of the new balances.
4. Check that the closing entries have been posted and that all revenue, expense,
Income Summary, and Drawing accounts have zero balances.
THE BASES OF ACCOUNTING: CASH AND ACCRUAL
Th e basis of accounting that a company chooses has a direct eff ect on the company’s
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individuals’ personal income taxes are recorded on the cash basis.
Small Business Success
SMALL BUSINESS SUCCESS
Appearing in select chapters throughout the
text, students will find this a motivating feature Do I Need an Accountant?
that emphasizes how accounting knowledge If you are not taking this class because you want to be • What software should I use for my accounting?
an accountant or a bookkeeper, you might be taking • How do I handle the payroll for employees?
and best practices are critical to the success of tah sem calalls bs ubseincaeusss.e M yoaun yp nlaenw o snm oawlln binugs ianneds so powernaetirnsg •• WWhhaatt aexrep emnys eresq auriere dmeednutcst ifboler f olinr gta txa xpeusr?poses?
take on the responsibilities of being the accountant • How do I prepare  nancial statements when
a small business in a competitive environment. for their business. However, at some point, your busi- applying for a loan?
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• What should my business structure be—sole
proprietorship, partnership, S corporation, or
corporation?
ProVen PedagogY
College Accounting, 11e is built on the solid pedagogical foundation created by Douglas McQuaig and appreciated by
instructors and students through ten editions. The new author team of College Accounting, 11e has based the revision
on their experience teaching college accounting and from instructor feedback. The 11th edition incorporates engaging,
student-centered skills in the following areas: student success, real-world application, and teaching enhancements.
• Learning Objectives appear at the beginning of each chapter to help students focus on key learning outcomes.
They are also highlighted in the margin alongside the related text discussion. A learning objective number serves as
a reference to the objectives in the chapter review, exercises, and problems.
• Key Terms appear in blue and are defined in the text and repeated in the glossary at the end of each chapter. In ad-
dition, page numbers are included for each glossary term, making it easy for students to refer to a term in the chapter.
This consistent emphasis on accounting terminology as the language of business is found throughout the text.
• Remember margin notes provide learning hints or summaries, often alerting students to common procedural
pitfalls to help them complete their work successfully.
• F YI margin notes provide practical tips or information about accounting and business.
• Color-Coding of Documents and Reports continues in the eleventh edition of College Accounting. This tried
and true visual system helps students recognize and remember key points. This use of color also helps students un-
derstand the flow of accounting data by clearly identifying the different documents and reports used in the account-
ing cycle. Students begin to visualize how accountants transform data into useful information.
•   Source documents, such as invoices, bank statements, tax forms, and other material that originates with outside 
sources, are shown in yellow, salmon, and beige.
•   Journals, ledgers, trial balances, work sheets, and other forms and schedules used as part of the internal accounting 
process are shown in green.
•   Financial statements, including balances sheets, income statements, statements of owner’s equity, and statements 
of cash flows, are shown in blue.
Yellow, Salmon, Beige Green Blue
Inputs Process Outputs
•Source Documents • Trial Balances •Financial
•Bank Statements • Journals Statements
and • Ledgers •Income Statements
Reconciliations • Work Sheets •Statements of
•Tax Forms Owner’s Equity
• Schedules
•Balance Sheets
• Inventory, Property,
and Equipment •Statements of
Records Retained Earnings
•Statements of Cash
Flows
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