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Table of contents
  1. Preface
  2. 1 Accounting as a Tool for Managers
    1. Why It Matters
    2. 1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management
    3. 1.2 Distinguish between Financial and Managerial Accounting
    4. 1.3 Explain the Primary Roles and Skills Required of Managerial Accountants
    5. 1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards
    6. 1.5 Describe Trends in Today’s Business Environment and Analyze Their Impact on Accounting
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Thought Provokers
  3. 2 Building Blocks of Managerial Accounting
    1. Why It Matters
    2. 2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations
    3. 2.2 Identify and Apply Basic Cost Behavior Patterns
    4. 2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs
    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 Cost-Volume-Profit Analysis
    1. Why It Matters
    2. 3.1 Explain Contribution Margin and Calculate Contribution Margin per Unit, Contribution Margin Ratio, and Total Contribution Margin
    3. 3.2 Calculate a Break-Even Point in Units and Dollars
    4. 3.3 Perform Break-Even Sensitivity Analysis for a Single Product Under Changing Business Situations
    5. 3.4 Perform Break-Even Sensitivity Analysis for a Multi-Product Environment Under Changing Business Situations
    6. 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage
    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
  5. 4 Job Order Costing
    1. Why It Matters
    2. 4.1 Distinguish between Job Order Costing and Process Costing
    3. 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing
    4. 4.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts
    5. 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production
    6. 4.5 Compute the Cost of a Job Using Job Order Costing
    7. 4.6 Determine and Dispose of Underapplied or Overapplied Overhead
    8. 4.7 Prepare Journal Entries for a Job Order Cost System
    9. 4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment
    10. Key Terms
    11. Summary
    12. Multiple Choice
    13. Questions
    14. Exercise Set A
    15. Exercise Set B
    16. Problem Set A
    17. Problem Set B
    18. Thought Provokers
  6. 5 Process Costing
    1. Why It Matters
    2. 5.1 Compare and Contrast Job Order Costing and Process Costing
    3. 5.2 Explain and Identify Conversion Costs
    4. 5.3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage
    5. 5.4 Explain and Compute Equivalent Units and Total Cost of Production in a Subsequent Processing Stage
    6. 5.5 Prepare Journal Entries for a Process Costing System
    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
  7. 6 Activity-Based, Variable, and Absorption Costing
    1. Why It Matters
    2. 6.1 Calculate Predetermined Overhead and Total Cost under the Traditional Allocation Method
    3. 6.2 Describe and Identify Cost Drivers
    4. 6.3 Calculate Activity-Based Product Costs
    5. 6.4 Compare and Contrast Traditional and Activity-Based Costing Systems
    6. 6.5 Compare and Contrast Variable and Absorption Costing
    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
  8. 7 Budgeting
    1. Why It Matters
    2. 7.1 Describe How and Why Managers Use Budgets
    3. 7.2 Prepare Operating Budgets
    4. 7.3 Prepare Financial Budgets
    5. 7.4 Prepare Flexible Budgets
    6. 7.5 Explain How Budgets Are Used to Evaluate Goals
    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 Standard Costs and Variances
    1. Why It Matters
    2. 8.1 Explain How and Why a Standard Cost Is Developed
    3. 8.2 Compute and Evaluate Materials Variances
    4. 8.3 Compute and Evaluate Labor Variances
    5. 8.4 Compute and Evaluate Overhead Variances
    6. 8.5 Describe How Companies Use Variance Analysis
    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
  10. 9 Responsibility Accounting and Decentralization
    1. Why It Matters
    2. 9.1 Differentiate between Centralized and Decentralized Management
    3. 9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments
    4. 9.3 Describe the Types of Responsibility Centers
    5. 9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers
    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
  11. 10 Short-Term Decision Making
    1. Why It Matters
    2. 10.1 Identify Relevant Information for Decision-Making
    3. 10.2 Evaluate and Determine Whether to Accept or Reject a Special Order
    4. 10.3 Evaluate and Determine Whether to Make or Buy a Component
    5. 10.4 Evaluate and Determine Whether to Keep or Discontinue a Segment or Product
    6. 10.5 Evaluate and Determine Whether to Sell or Process Further
    7. 10.6 Evaluate and Determine How to Make Decisions When Resources Are Constrained
    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
  12. 11 Capital Budgeting Decisions
    1. Why It Matters
    2. 11.1 Describe Capital Investment Decisions and How They Are Applied
    3. 11.2 Evaluate the Payback and Accounting Rate of Return in Capital Investment Decisions
    4. 11.3 Explain the Time Value of Money and Calculate Present and Future Values of Lump Sums and Annuities
    5. 11.4 Use Discounted Cash Flow Models to Make Capital Investment Decisions
    6. 11.5 Compare and Contrast Non-Time Value-Based Methods and Time Value-Based Methods in Capital Investment Decisions
    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 Balanced Scorecard and Other Performance Measures
    1. Why It Matters
    2. 12.1 Explain the Importance of Performance Measurement
    3. 12.2 Identify the Characteristics of an Effective Performance Measure
    4. 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added
    5. 12.4 Describe the Balanced Scorecard and Explain How It Is Used
    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
  14. 13 Sustainability Reporting
    1. Why It Matters
    2. 13.1 Describe Sustainability and the Way It Creates Business Value
    3. 13.2 Identify User Needs for Information
    4. 13.3 Discuss Examples of Major Sustainability Initiatives
    5. 13.4 Future Issues in Sustainability
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Thought Provokers
  15. A | Financial Statement Analysis
  16. B | Time Value of Money
  17. C | Suggested Resources
  18. 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
  19. Index

Welcome to Principles of Accounting, an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining highest standards of academic rigor at little to no cost.

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About Principles of Accounting

Principles of Accounting is designed to meet the scope and sequence requirements of a two-semester accounting course that covers the fundamentals of financial and managerial accounting. This book is specifically designed to appeal to both accounting and non-accounting majors, exposing students to the core concepts of accounting in familiar ways to build a strong foundation that can be applied across business fields. Each chapter opens with a relatable real-life scenario for today’s college student. Thoughtfully designed examples are presented throughout each chapter, allowing students to build on emerging accounting knowledge. Concepts are further reinforced through applicable connections to more detailed business processes. Students are immersed in the “why” as well as the “how” aspects of accounting in order to reinforce concepts and promote comprehension over rote memorization.

Coverage and scope

Our Principles of Accounting textbook adheres to the scope and sequence requirements of accounting courses nationwide. We have endeavored to make the core concepts and practical applications of accounting engaging, relevant, and accessible to students.

Principles of Accounting, Volume 1: Financial Accounting

Chapter 1: The Role of Accounting in Society

Chapter 2: Introduction to Financial Statements

Chapter 3: Analyzing and Recording Transactions

Chapter 4: The Adjustment Process

Chapter 5: Completing the Accounting Cycle

Chapter 6: Merchandising Transactions

Chapter 7: Accounting Information Systems

Chapter 8: Fraud, Internal Controls, and Cash

Chapter 9: Accounting for Receivables

Chapter 10: Inventory

Chapter 11: Long-Term Assets

Chapter 12: Current Liabilities

Chapter 13: Long-Term Liabilities

Chapter 14: Corporation Accounting

Chapter 15: Partnership Accounting

Chapter 16: Statement of Cash Flows

Principles of Accounting, Volume 2: Managerial Accounting

Chapter 1: Accounting as a Tool for Managers

Chapter 2: Building Blocks of Managerial Accounting

Chapter 3: Cost-Volume-Profit Analysis

Chapter 4: Job Order Costing

Chapter 5: Process Costing

Chapter 6: Activity-Based, Variable, and Absorption Costing

Chapter 7: Budgeting

Chapter 8: Standard Costs and Variances

Chapter 9: Responsibility Accounting and Decentralization

Chapter 10: Short-Term Decision-Making

Chapter 11: Capital Budgeting Decisions

Chapter 12: Balanced Scorecard and Other Performance Measures

Chapter 13: Sustainability Reporting

Engaging feature boxes

Throughout Principles of Accounting, you will find features that engage students by taking selected topics a step further.

  • Your Turn. This feature provides students an opportunity to apply covered concepts.
  • Concepts in Practice. This feature takes students beyond mechanics and illustrates the utility of a given concept for accountants and non-accountants. We encourage instructors to reference these as part of their in-class lectures and assessments to provide easily relatable applications.
  • Think It Through. This scenario-based feature puts students in the role of decision-maker. With topics ranging from ethical dilemmas to conflicting analytical results, the purpose of this feature is to teach students that in the real world not every question has just one answer.
  • Continuing Application at Work. This feature follows an individual company or segment of an industry and examines how businesspeople conduct the decision-making process in different situations. It allows students to see how concepts build on each other.
  • Ethical Considerations. This feature illustrates the ethical implication of decisions, how accounting concepts are applied to real-life examples, and how financial and managerial decisions can impact many stakeholders.
  • IFRS Connection. This feature presents the differences and similarities between U.S. GAAP and IFRS, helping students understand how accounting concepts and rules between countries may vary and thus affect financial reporting and decision-making.
  • Link to Learning. This feature provides a very brief introduction to online resources and videos that are pertinent to students’ exploration of the topic at hand.

Pedagogical features that reinforce key concepts

  • Learning Objectives. Each chapter is organized into sections based on clear and comprehensive learning objectives that help guide students on what they can expect to learn. After completing the modules and assessments, students should be able to demonstrate mastery of the learning objectives.
  • Summaries. Designed to support both students and instructors, section summaries distill the information in each module down to key, concise points.
  • Key Terms. Key terms are bolded the first time that they are used and are followed by a definition in context. Definitions of key terms are also listed in the glossary, which appears at the end of the chapter.

Assessments to test comprehension and practice skills

An assortment of assessment types are provided in this text to allow for practice and self-assessment throughout the course of study.

  • Multiple Choice are basic review questions that test comprehension.
  • Questions include brief, open-response questions to test comprehension.
  • Exercises (Sets A and B) are application questions that require a combination of quantitative and analytical skills.
  • Problems (Sets A and B) are advanced activities that allow students to demonstrate learning and application of multiple learning objectives and skills concurrently in one set of facts. Problems are designed to assess higher levels of Bloom’s taxonomy.
  • Thought Provokers are open-ended questions, often with more than one acceptable response, designed to stretch students intellectually.

Effective art program

Our art program is designed to enhance students’ understanding of concepts through clear and effective presentations of financial materials and diagrams.

A journal entry.
Figure 1 Journal Entry.
A T-account.
Figure 2 Work in Process Inventory T-Account.
An income statement.
Figure 3 Income Statement.
A sample company organizational chart.
Figure 4 Organizational Chart.
Data showing cash interest payments, interest on the carrying value, amortization of the discount, and the carrying value for a 5-year period.
Figure 5 Cash Interest Payment.
A general ledger.
Figure 6 General Ledger.

Answers to Questions in the Book

Students can find odd-numbered answers to Multiple Choice and Questions in the Answer Key. Answers to all odd and even-numbered Multiple Choice, Questions, Exercises, Problems, and Thought Provokers are provided only to instructors in the Instructor Answer Guide via the Instructor Resources page.

Additional resources

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About the authors

Senior contributing authors

Mitchell Franklin, Le Moyne College (Financial Accounting)

Mitchell Franklin (PhD, CPA) is an Associate Professor and Director of Undergraduate and Graduate Accounting Programs at Le Moyne College’s Madden School of Business. His research interests include the impact of tax law on policy, and innovative education in both financial accounting and taxation, with articles published in journals including Issues in Accounting Education, Advances in Accounting Education, Tax Notes, Journal of Taxation, and The CPA Journal and Tax Adviser. He teaches introductory and advanced courses in individual and corporate taxation as well as financial accounting. Prior to joining Le Moyne College, he served on the faculty at Syracuse University.

Patty Graybeal, University of Michigan-Dearborn (Managerial Accounting)

Patty Graybeal received her BBA from Radford University and her MACCT and PhD from Virginia Tech. She teaches undergraduate and graduate courses in financial, managerial, governmental, and international accounting. She has published scholarly articles on performance plans and compensation structures, as well as bankruptcy prediction, and she currently focuses on pedagogical issues related to instructional methods and resources that enhance student academic success. Prior to UM-Dearborn, she was on the faculty at Wake Forest University, George Mason University, and Virginia Tech. She brings significant real-world experience to the classroom from her prior work in healthcare administration and her current work with the auto industry.

Dixon Cooper, Ouachita Baptist University

Dixon Cooper received his BBA in Accounting and MS in Taxation from the University of North Texas. He has taught undergraduate and graduate courses in accounting, finance, and economics. In addition to his academic activities, he served for approximately fifteen years as an author/editor for the AICPA’s continuing education program and maintained a tax compliance and financial services practice. He also has several years of experience in public accounting and consulting. Prior to teaching at Ouachita Baptist University, he was a faculty member at the University of North Texas, Texas Christian University Austin College, and the University of Arkansas.

Contributing authors

LuAnn Bean, Florida Institute of Technology

Ian Burt, Niagara University

Shana Carr, San Diego City College

David T. Collins, Bellarmine University

Shawna Coram, Florida State College at Jacksonville

Kenneth Creech, Briar Cliff University

Alan Czyzewski, Indiana State University

Michael Gauci, Florida Atlantic University

Cindy Greenman, Embry-Riddle Aeronautical University

Michael Haselkorn, Bentley University

Christine Irujo, Westfield State University

Cynthia Johnson, University of Arkansas at Little Rock

Cynthia Khanlarian, North Carolina Agricultural and Technical State University

Terri Lukshaitis, Ferris State University

Debra Luna, Southwest University

Bill Nantz, Houston Community College

Tatyana Pashnyak, Bainbridge State College

Brian Pusateri, University of Scranton

Ellen Rackas, Muhlenberg College

Marianne Rexer, Wilkes University

Roslyn Roberts, California State University, Sacramento

Rebecca Rosner, Long Island University

Jeffrey J. Sabolish, University of Michigan-Flint

Jason E. Swartzlander, Bluffton University

Diane Tanner, University of North Florida

Mark M. Ulrich, Queensborough Community College

Janis Weber, University of Louisiana Monroe

Linda Williams, Tidewater Community College

Darryl Woolley, University of Idaho


Janice Akao, Butler Community College

Chandra D. Arthur, Cuyahoga Community College

Kwadwo Asare, Bryant University

Dereck Barr-Pulliam, University of Wisconsin–Madison

John Bedient, Albion College

Debra Benson, Kennesaw State University

Amy Bourne, Oregon State University

Stacy Boyer-Davis, Northern Michigan University

Dena Breece, Methodist University

Lawrence Chui, University of St. Thomas, Minnesota

Sandra Cohen, Columbia College Chicago

Bryan Coleman, Assumption College

Sue Cooper, Salisbury University

Constance Crawford, Ramapo College of New Jersey

Cori O. Crews, Valdosta State University

Annette Davis, Glendale Community College

Ronald de Ramon, Rockland Community College

Julie Dilling, Moraine Park Technical College

Terry Elliott, Morehead State University

Jim Emig, Villanova University

Darius Fatemi, Northern Kentucky University

Rhonda Gilreath, Tiffin University

Alan Glazer, Franklin & Marshall College

Marina Grau, Houston Community College

Amber Gray, Adrian College

Jeffry Haber, Iona College

Michelle Hagadorn, Roanoke College

Regina Ivory Butts, Fort Valley State University

Simone Keize, Broward College

Christine Kloezeman, California State University, Los Angeles

Lauri L. Kremer, Lycoming College

W. Eric Lee, University of Northern Iowa

Julie G. Lindsey, University of Phoenix

Jennifer Mack, Lindenwood University

Suneel Maheshwari, Indiana University of Pennsylvania

Richard Mandau, Piedmont Technical College

Josephine Mathias, Mercer County Community College

Ermira Mazziotta, Muhlenberg College

Karen B. McCarron, Georgia Gwinnett College

Michelle A. McFeaters, Grove City College

Britton McKay, Georgia Southern University

Christopher McNamara, Finger Lakes Community College

Glenn McQueary, Houston Community College

Tammy Metzke, Milwaukee Area Technical College

Stacey Mirinaviciene, Keuka College

Eleonor Moore, Kirtland Community College

Hassan Niazi, Northern State University

Felicia Olagbemi, Colorado State University-Global Campus

Suzanne Owens, Colorado Mesa University

Jenice Prather-Kinsey, University of Alabama at Birmingham

Tom Prieto, College of the Canyons

Atul Rai, Wichita State University

Kevin Raiford, College of Southern Nevada

Dave Repp, Strayer University

Patrick Rogan, Cosumnes River College

John Rossi, Moravian College

Angela Seidel, Saint Francis University

Margaret Shackell, Cornell University

Debra Sinclair, University of South Florida St. Petersburg

Mohsen Souissi, Fayetteville State University

Zivia Sweeney, University of Southern California

Tim Swenson, Sullivan University

Hai Ta, Niagara University

Andress Walker, Ventura County Community College District

Teresa Walker, Greensboro College

Roland Warfield, Seton Hill University

Michael Wiggins, Georgia Southern University

Joseph Winter, Niagara University

David Ziebart, University of Kentucky

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