Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics The top Business and Leadership books of last year picked by site Book. Accounting for Non-Accountants by Wayne A. Label is a marvelous little book for getting acquainted with basic financial statements such as, primarily, the. Editorial Reviews. Review. "The 12 short, readable chapters offer a plethora of Similar books to Accounting for Non-Accountants: The Fast and Easy Way to.
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What Readers Are Saying About Accounting for Non-Accountants “I have worked in accounting for over twenty-five years, and this is the best book that I have. non-financial indicators. The second part of the book deals with the nitty-gritty of manage- ment accounting and introduces terminology and techniques likely to. Accounting for Non-Accountants book. Read 8 reviews from the world's largest community for readers. Accounting for Non-Accountants is the perfect account.
He has also been a senior examiner for a major examining board since He is the author of a number of textbooks on accounting, economics and related areas - most recently Business Accounting Basics, co-authored with Frank Wood, published in Total items: View cart Checkout. Sample chapter. Accounting for Non-Accountants David Horner. Understand the fundamentals of accounting and finance with this layman's guide to annual accounts, management accounting and financial management. About the book Table of contents Supporting resources About the book Accounting for Non-Accountants provides the perfect introduction to the basics of accounting and finance.
About the authors. Table of contents Chapter - Financial Record Keeping; Chapter - Income Statements; Chapter - The Balance Sheet; Chapter - Further Adjustments to the Income Statement; Chapter - Checking the Double-Entry System; Chapter - Accounting for Non-Accountants by Wayne A. Label is a marvelous little book for getting acquainted with basic financial statements such as, primarily, the Balance Sheet and the Income Statement, in addition to the Statement of Cash Flows and the Statement of Retained Earnings.
The book is geared for people new to accounting principles, as it lays out, for instance, different sequential snapshots of the balance sheet to demonstrate how individual adjustments are treated. This is probably the highlight feature of the book for newcomers--its straightforward and sequential layout of accounting transactions.
With that said, let it be clear that Label has personality, demonstrated by his occasional use of humor and his engaging writing style. Furthermore, Label covers a large scope of interesting material--not just information on financial statements-- to give beginners a broad overview of the industry.
To explain, about half of the book is dedicated to the financial statements, journal, and ledger, while the other half is dedicated to concepts such as fraud prevention, audits, GAAP, and--perhaps most interestingly--ratios including rate of return on investment, current ration, sales ratios, and many others for reporting short-term or long-term analysis of financial data.
These principles outline the requirements for accounting, such as both the requirement that financial statements be relayed in monetary terms and the requirement that the depreciation estimates be sufficiently verifiable. As another example, the book provides a somewhat cursory albeit introductory discussion on both the journal and the ledger, while providing a clear definition of the double accounting system, including an accessible definition of the somewhat arbitrary meaning of both credits and debits.
Perhaps unique to Label's book is the emphasis on corporations, where he outlines concepts such as preferred versus common stock, cash dividends, stock dividends, and stock splits. This section is more advanced than the rest of the book, but will be especially of interest if the reader either plans to incorporate, of course, or has had prior experience with the stock market.
While Label's book is an excellent introduction to accounting principles with overviews of some advanced concepts such as stocks, corporations, and audits , it is only the first stop for acquiring a solid footing in accounting concepts.
A good follow-up and relatively more advanced and academic book to Label's that I've started reading is Barron's Accounting by Peter J.
Eisen's book does not ease the newcomer into accounting principles like Label's does, but it offers a lot more in-depth practice and insight into financial statements. Eisen's book also emphasizes proprietorship, unlike Label's which focuses a great deal on the corporation. Another book recommendation to read in tandem with Label's is Accounting Made Simple: All in all, I'd recommend starting with Label's book if 1 you have little to no background in accounting, 2 you would like an overview of the industry, or 3 your long-term agenda includes setting up a corporation.
In brief, Dr. Label's 10 Minute Guide Written in simple, easy to understand language, the book opens up the world of accounting to those who have no formal training in business. The Ten Minute Guide Label skillfully introduces the four key areas of accounting- GAAP rules, the balance sheet, the income statement, and the cash flow statement. For each area, he painstakingly defines the components that go into each area and the relationships between the individual components in an area as well as the relationships between different areas.
He broadens his explanation of each area by introducing simple to follow examples of their use throughout the text. Although most of the book's emphasis is on the accounting required by sole proprietorships or partnerships, Dr. Label does extend the concepts to the stock corporation, and devotes two chapters to the analysis of a corporation's financial statements. In addition, Dr. Label takes the reader through audits and auditors, the basics of keeping a general journal, the use of various financial statements for short and long term analysis, and the use of budgeting in business.
Finally, one chapter covers some basic information on the internet and accounting a subject that is a book unto itself , and Dr. Label thoughtfully provides a comprehensive and understandable glossary of key terms for quick reference.
Although the book is small, it is packed with a lot of useful information which is presented in a clear and succinct manner. It serves as an excellent springboard into the world of accounting, and provides a firm basis for understanding financial data and making good judgements based on such data. After reading this book, one can safely and confidently converse with an accountant and walk away with one's wallet full of cash still in one's pocket. Imagine that! The book is recommended, a nice book to read.
One person found this helpful. This is a remarkable book. I would highly recommend it to anyone desiring to learn basic accounting made easy. I found this book at the library and decided to get my own copy. The author did a fantastic job explaining the concepts.
Therefore, I knew I wanted this book in my personal library. I ordered this for a friend that was taking accounting. I had used a copy of this book from my public library for a project I had to do for my Principles of Accounting course in college and it helped me to do a good job on the project and pass the course. I'm absolutely terrible at accounting and this book made it seem not so bad. It includes diagrams and very informative information on how to do basic accounting.
The author is an actual CPA who breaks down the rules of accounting into a step by step process that you can learn at your own level. Nice book and great summary of Accounting. I think Dr. Label's book offered me a great refresher in basic accounting.
I took accounting, over thirty years ago. Many changes have occurred since then, however, this books sums up basic accounting as I remember. It is one of the three major statements produced by businesses in the United States, the other two being the Balance Sheet and the Statement of Cash Flows. Net Income: The difference between Revenue and Expenses for a designated period of time. The first, Net Income from operations, shows all normal Revenue and Expenses that deal with the main operations of this business—selling bicycles.
The second usage was Net Income before taxes, where Net Income from operations is increased and reduced by other Revenue and Expenses that are outside the normal operations of this business— like repairing bicycles. The third usage was Net Income. It is derived by reducing Net Income before taxes, by the amount of Income Taxes for the year. Other Revenues and Expenses: This term refers to the recording of the Revenues and Expenses in the records of the company. This occurs at the point in time when Revenue and Expenses are shown on the Income Statement.
Revenues are recognized when services are performed or when title is transferred on goods sold. Expenses are recognized when they are incurred and become an obligation of the company. The Income Statement 63 Revenue: Since the main business of the company is to sell bicycles, the Revenue that is earned from the repairs is shown as other income.
Although things are looking good so far, Sam has a nagging concern, which she raises at a meeting with her busi- ness advisor: Is that right? As we discussed in chapter 4, making a profit, or having a large amount in Retained Earnings, does not equal hav- ing cash. And if there is no cash, there is no way to pay the salaries, pay the IRS, or pay any other bills for that matter. In this chapter we will discuss the Statement of Cash Flows and the financial statement, which will help Sam in her quest to stay on top of the cash flow in her business.
What Is a Statement of Cash Flows? Do you remember the other three? The Statement of Cash Flows shows the flow of cash within the business—where the cash came from and how it was spent during the period of reporting which is generally a month, a quarter, or a year.
It also shows the cash flows of the company, divided into categories according to three major activities: This is helpful to statement users, business owners, investors, and creditors because it indicates the type of transaction that gave rise to each one of the cash flows.
The Balance Sheet shows the financial status of a company at the end of the reporting period a snapshot , but both the Income Statement and the Statement of Cash Flows show the flow of activity during the reporting period a short movie compared to the snapshot that is the Balance Sheet. Remember from chapter 4, that under the cash basis of accounting, Revenue is not reported until cash is received, and Expenses are not reported until cash is disbursed.
What Is the Purpose of the Statement? Like the other required financial statements you have learned about— the Balance Sheet and the Income Statement—the Statement of Cash Flows enables users to make decisions about the company. It shows the transactions that caused cash levels to change from the beginning of the period to the end.
As was mentioned earlier, a company can make a profit or earn a large amount of Revenue but not have enough cash to pay its bills. There are several ways in which you might use a Statement of Cash Flows in your own life.
Will you have sufficient cash at the end of the month to download additional Inventory? Will you have the cash necessary to pur- chase a new building for the planned expansion? It is also defined as liq- uid short-term investments; liquid investments are those that can quickly be converted into cash within a very short period of time, usually by cashing them in in the case of certificates of deposit, for example or by selling them. For this reason, they are also referred to as cash equivalents.
See figure 5. By reviewing the Statement of Cash Flows in figure 5. Figure 5. Parentheses indicate decreases in cash Cash Flow from Operating Activities: Cash Inflows: From Customers. Accounts Receivable 9, Repair Revenue. Cost of Goods Sold. download of Truck. Borrowing for the Mortgage. Operating Activities As was mentioned earlier, the Statement of Cash Flows reports cash flow related to three areas: This is because a list of cash flows means more to business owners, investors, and creditors as they analyze the business if they can determine the type of transaction that gave rise to each one of the cash flows.
In the case of Solana Beach Bicycle Company, the cash generated from operations would include the money brought in due to bicycle sales and repairs. See Income Statement in figure 4. Some of the sales were made on credit. Next it is necessary to calculate the cash outflows from Operations. This is comprised of Cost of Goods Sold the amount of cash spent on the goods that were sold minus the portion that was loaned to the company, also called Accounts Payable and all of the operat- ing expenses on the Income Statement figure 4.
Why is that? But the company does not expend any money for this expense. Why is this? Well, the company bought a 3-year Insurance Policy. What do you think these would be?
If you said Inventory and Insurance, you would be correct. Cash was spent to download the goods that are still in Inventory, and thus becomes a cash outflow. This means that the company had more cash outflows than cash inflows from operations for the year Investing Activities Any time a company makes a download of property, plant, or equip- ment, this addition is treated as an investment in the organization.
This investment represents a cash flow from the company. Even though the entire download may not have been with cash, but with some borrowed money, the entire download is shown as a cash flow in the investing section of the Cash Flow Statement, and any borrowing of money is shown separately in the financing section. In figure 5. Financing Activities The section called financing activities represents the cash that has come into or out of the company for the purpose of financing all of the other activities of the business.
This could include Retained Earnings and money brought in by stock issued by the company, or as we can see in figure 5. If she invests personal funds in the business, while this is a decrease in her personal cash funds, it is an increase in funds for the business. Because this investment was in cash, it is shown as an increase in the cash flow from financing activi- ties.
Notice that this total represents the change in cash from the begin- ning of the year to the end of the year. In this chapter you have learned how to prepare the Statement of Cash Flows. In chapter 6 you will learn how accounting for corpora- tions differs from accounting for an individual proprietorship.
Glossary Cash: Includes currency and coins, balances in checking accounts, as well as any item that is acceptable into these checking accounts, such as checks and money orders. Cash Equivalents: The cash held by a business as well as the liquid short-term investments that can quickly be converted into cash within a very short period of time. Financing Activities: One of the three categories of business activ- ity represented on the Cash Flow Statement.
This section of the state- ment represents the cash that has come into or out of the company for the purpose of financing all of the other activities. In the case of Solana Beach Bicycle Company, this includes the money borrowed on the mortgage and the money Sam invested in the business.
Investing Activities: This section of the state- ment shows those downloads of property, plant, or equipment. These items are treated as an investment in the organization and represent a cash flow out of the company. Operating Activities: One of the three categories of business activity represented on the Cash Flow Statement.
In the case of Solana Beach Bicycle, this would include cash generated from bicycle sales and repairs. Statement of Cash Flows: One of the four required financial statements. This statement shows where the cash came from and how it was spent during the period of reporting.
In other words, the business has one owner: She has invested some of her own money into the company as well as borrowing some additional money. Now Sam is thinking of growing her business. She has decided to investigate the pos- sibility of incorporating her business and selling stock in her business.
But what is a corporation, really? Corporations can be set up as for-profit or not-for-profit. For-profit corporations depend on making money in order to continue into the future. Not-for-profit corpora- tions do not depend upon this profit to continue. These types of busi- ness, rather than depending on their profit, depend on gifts and grants from the public and private sectors for their continuation.
Examples of not-for-profit corporations include charitable, governmental, edu- cational, and recreational organizations.
Although incorporation has many ben- efits, it should also be noted that the proprietor loses partial or majority control to the other stockholders.
The amount of paperwork and oversight also increases. Before making the decision to incorporate you should seek professional advice from your accountant, lawyer, and financial advisor regarding the pros and cons. A corporation is given the right to operate a charter from the state in which it incorporates. However, the fact that a business is incorpo- rated in one state does not mean that it cannot operate in the others. Due to differing tax laws and the incorporation fees, some states have become more advantageous to incorporate in than others.
The Corporation 77 Characteristics of a Corporation There are several characteristics that differentiate a corporation from other forms of business. One of the characteristics of a corporation that distinguishes it from a partnership or a proprietorship is that it has limited liability.
This means that the creditors of a corporation can lay claim only to the Assets of the corporation. Each state has a law that prevents a corporation from paying dividends that is, owners with- drawing Assets whenever the net Assets Assets minus Liabilities are at or below a certain level. This minimum net Asset figure is often called the legal capital of a corporation. Figure 6. Some of these reasons might include: Incorporation may even provide the company with more credibility in the eyes of the business community and the general public.
When a corporation receives its charter from the state, it also receives the right to sell a particular number of shares of stock to the public.
Each share represents part ownership in the company. This number of shares the charter allows the corporation to sell is called the authorized shares. The corporation can sell as many shares as it chooses up to this authorized amount, but no more. When the stock is initially sold to the public, the corporation will receive the money. After the initial sale, when the stock is sold from one individual to another on a stock market such as the New York Stock Exchange or the NASDAQ , this money does not affect the Assets of the corporation.
The shareholders are jointly the owners of a corporation and can legally receive a distribution of the Assets of the corporation in two ways. First, the corporation can play dividends. Second, the corpora- tion can be liquidated—that is, all the Liabilities are paid off and the remaining Assets distributed to the shareholders, which means that the corporation ceases to operate.
Types of Capital Stock Usually, two types of capital stock can be authorized by the state: Some Characteristics of Figure 6. This means that if the preferred shareholders are not paid their full dividend in any year, in subse- quent years dividend payments to the preferred shareholders must be sufficient to cover the previously inadequate dividend payments before any dividends can be paid to the common stockholders.
The common and preferred stock may or may not have a par value; par value is the value assigned to each share by a corporation in its corporate charter. Stock rarely, if ever, is initially sold by a corporation for less than par value, either because state laws prevent such a sale or because the laws allow the creditors of the corporation to hold stockholders per- sonally liable to the extent of any such discount.
This can vary since par value stock is often sold for more than the par value figure. This legal capital amount is an important figure because a corporation may not issue dividends that would cause the net Assets Assets-Liabilities to go below the amount of this legal capital. Understanding Dividend Calculations: The Balance Sheet will not show dividends in arrears as a Liability.
Some preferred stock is non-cumulative, which means that if a year passes and the preferred stockholders do not receive a dividend, those shareholders never receive that dividend payment. The Common Stockholders will never receive the dividends that were missed in the past years. The amount or percentage of dividends that the preferred shareholders can receive in excess of the amount to which they have a prior claim varies considerably from company to company and is determined by the board of directors.
Quiz Assume that the Blanca Corporation has 10, shares of cumula- tive, participating, preferred stock outstanding. The Preferred Stock participates at the 30 per- cent level, meaning that these stockholders will receive 30 percent of whatever excess dividends are left over after the initial dividends have been paid. How much in total do the preferred and common stockholders receive in dividends this year? See page 94 for the answer.
The reason for this is that the stockholders are the owners of the corporation. Usually dividends can be paid, but only to the extent of the total Retained Earnings, i. In addition, a corporation obviously cannot pay a cash dividend unless it has the cash to do so, and the cash is not needed for other purposes.
Often, a corporation has sizable Retained Earnings as a result of successful operations in the past, but very little cash, which reduces its ability to pay dividends. Quick Tip There are two goals of a corporation: The act of issuing a cash dividend is a double-edged sword. On the one hand it will satisfy the immediate needs of the stockholders to receive cash, but on the other hand it will deplete cash in the company for future investment and growth. Therefore management needs to carefully adjust this balance to satisfy both the short- and long-term goals of the stockholders.
Dividends without Cash Stock Dividends Dividends can be divided into two categories, cash and stock. Companies often declare and issue stock dividends instead of cash dividends. Only when the board of directors declares dividends of any kind do they become legal liabilities of the corporation. Once the dividends are declared, the corporation is legally required to pay these dividends or issue the additional shares within a specified period of time.
There are several reasons why a corporation may issue stock divi- dends instead of cash. There may not be sufficient cash to pay a cash dividend, so rather than not issuing any dividends that year at all, the board may decide to issue the stock dividend instead. Another reason for issuing the stock dividend might be that the company needs the cash for other purposes.
If, for instance, they are planning an expan- sion of operations to Brazil and need to accumulate cash in order to begin the new operation, they can issue stock dividends in order to keep sufficient levels of cash necessary for the expansion. Restrictions on Issuing Stock Dividends: In order for a corporation to issue stock dividends, it must have enough authorized stock that has not been issued. If it does not, the corporation will have to apply for the issuing of more stock from the Secretary of State in the state in which the corpora- tion is incorporated.
Stock Splits A company can also declare a stock split instead of issuing cash divi- dends. Stock may be split in a variety of ways— for example, two for one, three for one, three for two, and so on. In a two for one stock split, each share becomes two shares. In a three for two stock split, every two shares becomes three shares. So, for example, a stockholder who held ten shares would have fifteen shares after the split.
Whether the company issues a stock dividend or a stock split, it must have the additional shares authorized by the state prior to the issue. If the company already has an amount of authorized shares that have not yet been issued, then this is unnecessary. A company may split its stock for several reasons. One reason is that a stock split increases the number of shares on the market, which may mean that, in time, more people will own a part of the company. Another reason for a stock split is that increasing the number of shares reduces the price per share; thus, again, more people are able to download the shares.
One reason for this decision is that the brokerage fee on round lots one hundred shares or multiples thereof is less than on odd lots less than one hundred shares. Incorporating Solana Beach Bicycle Company Sale of Stock Now Samantha has heard all of these definitions, and the prospect of getting more capital into her business is very interesting to her.
By incor- porating, she is able to expand her business without putting any more of her own money into it. She incorporates her business using close to the same name as before, so as not to confuse her current customers, and calls the business—The Solana Beach Bicycle Corporation. When the new corporation sells stock, cash is increased if the stock was sold for cash , and the common stock account is increased by the same amount. This Capital in Excess of Par amount represents any amount paid into the corporation over and above the par value of the stock.
You may be wondering why the amount paid for the stock in the previous example is higher than the par value. Remember that the par value was simply a value assigned to each share of stock when the busi- ness was incorporated. By law in most states, the stock cannot be sold for below par, but can be sold for more than par value.
The impact on the Balance Sheet is shown in figure 6. The amount added to the common stock account equals the total stated value of the stock sold and any excess is added to the paid-in-capital account, now called Paid-in Capital in Excess of Stated Value, Common. The sale of preferred stock would cause the same changes as shown in the exam- ple, with the exception that the title of the accounts would be Preferred Stock and Paid-in Capital in Excess of Par, Preferred instead.
Quick Tip See Appendix B for more examples of the calculations discussed in this chapter. When stock has neither a par value nor a stated value, the common stock account is increased by whatever amount is realized upon the sale of the stock.
The Corporation 85 Payment of Cash Dividends When the board of directors declares cash dividends, the Retained Earnings figure is decreased and dividends payable, a Current Liability, is increased.
The Balance Sheet changes are shown in figure 6. The Income Statement is not affected at all by this declaration. Dividends Payable. Common Stock. XXX Retained Earnings. No Change When the dividend is actually paid, cash is decreased and dividends payable is decreased.
Financial statements are affected in the same manner when cash dividends are declared and paid to preferred shareholders. Stock Dividends and Retained Earnings: The only difference is that additional stock is being dis- tributed to the stockholders instead of cash. Since it has the same impact on Retained Earnings, however, the corporation must still have sufficient Retained Earnings to make this declaration.
The equity section of the Balance Sheet appears as shown in figure 6. Furthermore, neither the Assets nor the Liabilities of the corporation are affected by a stock dividend nor are the income or Expense items.
The accounting for a stock dividend is somewhat different when- ever the dividend is greater than 20 percent to 25 percent of the shares previously outstanding. Whenever such large stock dividends are issued, the market value of the stock is not relevant in determining the change in the Balance Sheet figures.
Instead, the Retained Earnings are reduced by the par value of the new shares. Since there are , shares outstanding in figure 6. Impact of Large stock dividend Figure 6. Now assume that the board of directors of the Solana Beach Bicycle Corporation declared a two-for-one stock split instead of a 50 per- cent stock dividend.
The Corporation 89 Figure 6. What Is Treasury Stock? When a corporation downloads back its own stock and does not cancel it or resell it, it is known as treasury stock. A corporation may download its own stock for a variety of reasons. For example, it may need the stock to distribute for stock dividends or to satisfy a stock option contract with its employees.
Until this stock is legally canceled or resold, it is known as treasury stock. Cost of Treasury Stock. Footnote 1: The Corporation 91 You should be aware of several changes caused by the download of the treasury stock: A corporation usually cannot download treasury stock unless its Retained Earnings is equal to or exceeds the cost of the treasury stock.
This restriction is necessary to prevent a corporation from reducing its capital below its required legal capital figure. Treasury Stock Is Not an Asset: The download of the stock by the cor- poration merely reduces the amount that the owners have invested in the business.
Dividends are paid only on outstanding stock, and treasury stock is not considered to be outstanding. Each corporation is authorized to issue a maximum number of shares as specified in the corporate charter. The number of shares authorized can be greater than or equal to the number of shares issued, but a corporation can issue no more shares than authorized.
Notice in Figure 6. The only change is to the number of shares outstanding. Even though the treasury stock is no longer outstanding, those shares are considered to still be part of the issued shares of the corporation. Selling the Treasury Stock The company can hold, sell, or cancel its treasury stock. The Corporation 93 Figure 6. The rules of accounting do not allow a corporation to make a profit on the sale of its own stock. This account is somewhat like the Paid-in Capital, Common account that results when stock is initially sold for more than its par value.
When treasury stock is sold for less than it cost, the Paid-In Capital, Treasury account is reduced. If this account does not exist or if the account is not large enough to absorb the difference between the sales prices and the cost of the treasury stock, the Paid-In Capital in Excess of Par, Common is reduced.
If this account is not sufficient, Retained Earnings is reduced. In this chapter you have learned about how the financial statements in a corporation differ from those of a proprietorship.
You have also learned about the corporate structure and how individual transactions affect the financial statements of a corporation. In chapter 7 you will learn about the double-entry system of accounting and how transac- tions are recorded in the accounting records. The amount of money that has not been paid on cumula- tive preferred stock. Since the stock is cumulative, in most cases, the dividends for common stock and other non-cumulative preferred stock may not be paid until the dividends in arrears have been paid.
Authorized Shares: The number of shares a state allows a cor- poration to issue to the public when the company is incorporated. If a corporation needs or wants to issue more stock than authorized in order to raise more capital, it must request the authorization of additional shares. Capital Stock: A term used to refer to both the Common and Preferred Stock of a corporation, which the company is initially authorized to issue when it receives its incorporation charter.
Cash Dividends: Dividends declared by the board of directors and paid in cash to stockholders. The corporation must have sufficient Retained Earnings and cash to make this declaration. After the declaration, once divi- dends are paid, cash and Retained Earnings are reduced.
Common Stock: One of the two types of stock that a corporation can issue to the public when it is chartered by the state. Common stock usually does not have a defined dividend amount per year, but only receives dividends when they are declared by the board of directors. Common stockholders usually have voting rights to elect the board of directors.
It is a legal separate entity. A company will request permission to exist from the secretary of state of any state. Once it has been granted the charter to operate, it may sell stock in order to raise capital. Cumulative Preferred Stock: See also Preferred Stock. Legal Capital: In many states, this is the total par value of all stock sold. Paid-in Capital in Excess of Par: The amount of money received by a corporation from the sale of stock above the par value.
In some states, it is both the par value and the paid in capital in excess of par that represents the legal capital of the corporation. Participating Preferred Stock: For example, after the preferred stock- holders receive their 10 percent dividend, and the common stock- holders receive their declared amount of dividend, if there is money left in total declaration for the year, the common and the preferred will share in that amount.
If preferred stock is not participating, the total remaining amount will go to the common stockholders. Par Value: The value assigned by a corporation to each share of stock, common or preferred, when it is incorporated. In most states, the common stock cannot be sold at below par.
Generally, stock sells for more than the par value rather than at the par value itself. Preferred Stock: One of the two types of stock that a corporation can issue upon receiving its charter from the state. This type of stock has preference over the Common Stockholders for when dividends are issued and also will receive its money back from the corporation first if there is a liquidation.
Stock Dividends: Dividends declared by the board of directors and issued to the stockholders in the form of additional shares of stock rather than cash.
The corporation must have sufficient Retained Earnings and authorized stock to make this declaration. Stock Split: A stock split is declared by the board of directors to split the number of shares that a stockholder currently holds.
These splits can be for two for one, three for one, etc. The corporation must have a sufficient number of authorized shares to make the split. Often, stock splits are declared by the board of directors when the price of the stock is very high and the corporation wants to encour- age more stockholders in the corporation by lowering the price of each share.
Treasury Stock: This stock remains on the books of the issuing corporation until it cancels the stock or resells the shares back to the public. Treasury stock appears on the Balance Sheet as a reduction of Retained Earnings.
But even though you may never become an accountant, you will need to understand these concepts in order to have a solid grasp of accounting and business. What Is a Debit?: The word debit simply refers to the left side of the amount columns and the word credit identifies the right side of the amount columns.
Nothing more, nothing less. Debit does not mean something unfavorable and credit does not mean something favorable, as some non-accountants often believe. The General Journal Some time after a business transaction occurs it is recorded in a book called the general journal. While there are many different kinds of journals, it is most important to focus on the general journal. A general journal is often referred to as the book of original entry because this journal is the book in which a transaction is first recorded.
If a company were to download land for cash, the pages of a general jour- nal will look like the one shown in figure 7. Double-Entry Accounting 99 Figure 7. When you increase or decrease the debits by the same amount as you increase or decrease the credits on each transaction, you make sure that the debits always equal the credits, a key goal of bookkeeping. If the debits do not equal the credits at the end of the period month, quarter, or year , it indicates that a mistake was made somewhere along the line and one of the transactions was entered improperly.
By using this system, the Accounting Equation always stays in balance after each transaction is recorded, since you are increasing or decreasing both sides of the equation by equal amounts.
Figure 7. It is important to remember that every single transaction in the journal must be recorded as both a debit and a credit.
This trans- action would be recorded as shown in figure 7. See figure 7. This transaction would be recorded in the general journal as shown in figure 7. Thus, depending upon which side of the accounting equation the account appears, this will determine if it is recorded as a debit or a credit see figure 7.
As you remember, this one transaction caused two changes to the Income Statement. Notice in the transaction in figure 7. These two transactions would be recorded in the general journal as seen in figure 7. In both of these transactions, the debits to record these transactions are equal to the credits. Looking at another transaction in chapter 4, Operating Expenses, you can see the impact on the General Journal.
This transaction would be recorded in the General Journal as shown in figure 7. Once again, the debits equal the credits. This transaction is recorded in the General Journal as follows in figure 7.
The General Ledger During the month, the journal entries made to record the January transactions would be posted from the general journal to the gen- eral ledger. The general ledger is a book containing a record of each account. See boxed section below figure 7. Posting is simply the process of transferring the information from the general journal to the individual account pages in the general ledger. The cash account, which probably is the first page or pages in the general ledger, would look like the example in figure 7.
Double-Entry Accounting Figure 7. Amount Date Comments Ref. Amount Notice that the account has two sides. As before, the left side is used to record the debits and the right side is used to record the credits. Notice that the sample ledger account in figure 7. In the ledger each item or account has a separate page with a separate number. In this case, cash has been assigned the number , and all cash transactions are recorded on this page.
The accounts are usually numbered for a variety of reasons; for exam- ple, to facilitate referencing or for use instead of the account name. This listing of accounts is normally called the chart of accounts. After posting the first journal entry January 1 , the cash account would look like figure 7. J-1 is entered in the refer- ence column and that tells you that the journal entry that recorded the transaction can be found on page one of the general journal.
Sixty thousand dollars is entered in the left-hand amount column. Now after posting the first entry, the general journal would appear as shown in figure 7. This step completes the posting process for the first journal entry. The same procedure is repeated until all the journal entries have been posted to the general ledger. After posting all the journal entries recorded in January, the cash account would look like figure 7. You could say that the cash account has a debit balance at the end of January.
Remember, in order to increase an Asset, we record a debit. This is reflected on the trial balance for the cash account before adjustments. A discus- sion of the trial balance follows.
A trial balance is merely a list of all accounts in the general ledger that have a balance other than zero, with the balance in each account shown and the debits and credits totaled. A trial balance of Solana Beach Bicycle Company at January 31, , would look like the one in figure 7. Once it is determined what the balance in each account is, this is noted on the trial Balance Sheet. Generally speaking the trial balance is prepared for two reasons.
The first reason is to determine whether the total debits equal the total credits. If they are not equal, some kind of error has been made either in the recording of the journal entries or in the posting of the general ledger. In either case the error must be located and corrected.