Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo

Menu
Table of contents
  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. A | Financial Statement Analysis
  19. B | Time Value of Money
  20. C | Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index
PA 1.

LO 5.1Identify whether each of the following accounts would be considered a permanent account (yes/no) and which financial statement it would be reported on (Balance Sheet, Income Statement, or Retained Earnings Statement).

  1. Accumulated Depreciation
  2. Buildings
  3. Depreciation Expense
  4. Equipment
  5. Fees Earned Revenue
  6. Insurance Expense
  7. Prepaid Insurance
  8. Supplies Expense
  9. Dividends
PA 2.

LO 5.1The following selected accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Accounts receivable $45,000, Prepaid insurance 4,500, Land 50,000, Accounts payable 39,000, Notes payable 55,000, Retained earnings 12,000, Dividends 2,000, Fees earned revenue 65,000, Selling expenses 34,500, Administrative expenses 12,750, Miscellaneous expense 1,250.
PA 3.

LO 5.1The following selected accounts and normal balances existed at year-end. Notice that expenses exceed revenue in this period. Make the four journal entries required to close the books:

Accounts receivable $46,200, Prepaid insurance 5,800, Land 12,000, Accounts payable 29,900, Notes payable 32,500, Retained earnings 55,400, Dividends 8,000, Fees earned revenue 89,200, Selling expenses 62,000, Administrative expenses 29,500, Miscellaneous expense 4,140.
PA 4.

LO 5.1Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 38,750 debit. Prepaid insurance 4,500 debit. Equipment 35,000 debit. Notes Payable 32,000 credit. Common Stock 10,000 credit. Retained Earnings 17,325 credit. Dividends 22,000 debit. Sales revenue 200,000 credit. Automobile expense 24,575 debit. Insurance expense 18,000 debit. Salaries expense 110,000 debit. Supplies expense 6,500 debit. Total debits and total credits each are 259,325.
PA 5.

LO 5.1Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 22,900 debit. Prepaid insurance 4,000 debit. Fixed Assets 44,000 debit. Notes Payable 40,000 credit. Common Stock 25,000 credit. Retained Earnings 48,350 credit. Dividends 22,000 debit. Sales revenue 150,000 credit. Automobile expense 26,500 debit. Insurance expense 20,000 debit. Salaries expense 122,500 debit. Supplies expense 1,450 debit. Total debits and total credits each are 263,350.
PA 6.

LO 5.1Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Accounts Receivable debit balance 45,500. Fees Earned Revenue credit balance 60,000. Commission expense debit balance 7,200. Supplies Expense debit balance 5,500. Wages Expense debit balance 42,000. Dividends debit balance 3,500. Retained Earnings credit balance 51,000.
PA 7.

LO 5.1Assume that the first two closing entries have been made and posted. Use the T-accounts provided as follows to:

  1. complete the closing entries
  2. determine the ending balance in the Retained Earnings account
T-Accounts. Income Summary debit 212,000 and credit 277,500. Retained Earnings credit balance 45,900. Dividends debit balance 7,500.
PA 8.

LO 5.1Correct any obvious errors in the following closing entries by providing the four corrected closing entries. Assume all accounts held normal account balances in the Adjusted Trial Balance.


  1. Debit Income summary and credit Service Revenue 280,000.

  2. Debit Automobile expense 16,500, Insurance expense 24,000, Salaries expense 190,000, Supplies expense 18,500, and credit Income summary 249,000.

  3. Debit Retained earnings and credit Income summary 263,500.

  4. Debit Dividends and credit Retained earnings 10,000.
PA 9.

LO 5.2Assuming the following Adjusted Trial Balance, create the Post-Closing Trial Balance that would result, after all closing journal entries were made and posted:

Adjusted Trial Balance. Cash 22,900 debit. Prepaid insurance 4,000 debit. Fixed assets 44,000 debit. Notes payable 40,000 credit. Common stock 25,000 credit. Retained earnings 48,350 credit. Dividends 22,000 debit. Sales revenue 150,000 credit. Automobile expense 26,500 debit. Insurance expense 20,000. Salaries expense 122,500. Supplies expense 1,450. Debit total 263,350, credit total 263,350.
PA 10.

LO 5.2The following Post-Closing Trial Balance contains errors. Prepare a corrected Post-Closing Trial Balance:

Post-Closing Trial Balance. Cash 29,900 debit. Prepaid insurance 5,500 debit. Fixed assets 50,000 credit. Notes payable 46,000 credit. Common stock 32,000 debit. Retained earnings 7,400 credit. Debit total 67,400, credit total 103,400.
PA 11.

LO 5.2Assuming the following Adjusted Trial Balance, recreate the Post-Closing Trial Balance that would result after all closing journal entries were made and posted:

Adjusted Trial Balance. Cash 17,900 debit. Accounts receivable 9,900 debit. Supplies 1,600 debit. Prepaid insurance 2,500 debit. Salaries payable 8,600 credit. Common stock 10,000 credit. Retained earnings 2,800 credit. Dividends 4,000 debit. Service fee revenue 37,050 credit. Salaries expense 16,900 debit. Supplies expense 4,200 debit. Insurance expense 1,450 debit. Debit total 58,450, credit total 58,450.
PA 12.

LO 5.3Use the following Adjusted Trial Balance to prepare a classified Balance Sheet:

Adjusted Trial Balance. Cash 16,500 debit. Accounts receivable 17,200 debit. Supplies 2,200 debit. Prepaid insurance 2,100 debit. Equipment 14,000 debit. Accounts payable 14,200 credit. Unearned fee revenue 4,300 credit. Common stock 30,000 credit. Service fee revenue 21,500 credit. Salaries expense 12,000 debit. Rent expense 6,000 debit. Total debits and total credits 70,000.
PA 13.

LO 5.3Using the following Balance Sheet summary information, for the two years presented calculate:

  1. working capital
  2. current ratio
12/31/18 and 12/31/19, respectively: Current assets 101,600, 97,350. Current liabilities 33,650, 32,800.
PA 14.

LO 5.3Using the following Balance Sheet summary information, calculate for the two companies presented:

  1. working capital
  2. current ratio
Company L and Company M, respectively: Current assets $124,680, $180,550. Current liabilities 63,250, 153,250.
PA 15.

LO 5.3Using the following account balances, calculate for the two years presented:

  1. working capital
  2. current ratio
12/31/18 and 12/31/19, respectively: Unearned revenue $12,600, $6,000. Cash 33,200, 12,750. Prepaid rent 9,000, 6,000. Supplies 5,600, 2,500. Taxes payable 4,800, 5,500. Wages payable 8,500, 9,250.
PA 16.

LO 5.4From the following Company R adjusted trial balance, prepare the following:

  1. Income Statement
  2. Retained Earnings Statement
  3. Balance Sheet (simple—unclassified)
  4. Closing journal entries
  5. Post-Closing Trial Balance
Adjusted Trial Balance. Cash 44,000 debit. Accounts receivable 13,800 debit. Prepaid insurance 6,400 debit. Land 16,000 debit. Accounts payable 14,900 credit. Salaries payable 4,500 credit. Common stock 31,000 credit. Retained earnings 10,200 credit. Dividends 12,000 debit. Service Revenue 86,000 credit. Insurance expense 7,600 debit. Salaries expense 32,000 debit. Miscellaneous expense 14,800 debit. Total debits and total credits 146,000.
PA 17.

LO 5.4From the following Company T adjusted trial balance, prepare the following:

  1. Income Statement
  2. Retained Earnings Statement
  3. Balance Sheet (simple—unclassified)
  4. Closing journal entries
  5. Post-Closing Trial Balance
Adjusted Trial Balance. Cash 24,000 debit. Accounts receivable 14,900 debit. Prepaid insurance 5,300 debit. Land 13,500 debit. Accounts payable 12,400 credit. Salaries payable 1,500 credit. Common stock 34,000 credit. Retained earnings 10,200 credit. Dividends 5,000 debit. Service Revenue 56,300 credit. Insurance expense 7,900 debit. Salaries expense 39,000 debit. Miscellaneous expense 4,800 debit. Total debits and total credits 114,400.
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
Citation information

© Dec 12, 2022 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.