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vi Preface
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New to This Edition

• Updated dates and real company information for • In Chapter 4, the “Reversing Entry” appendix has
currency. been moved to an online appendix.
• Refreshed end-of-chapter assignments with different • A new “Why Is the Accrual Basis of Accounting
numerical values and updated information. Required by GAAP?” discussion has been added as
• A new “Time Period Concept” discussion has been Appendix 2 to Chapter 4. The understanding of why
added to the “Generally Accepted Accounting Prin- accrual accounting is required by GAAP is important
ciples” section of Chapter 1. This discussion defines for students’ ability to analyze and evaluate financial
and illustrates the natural business year and fiscal statements. Why accrual accounting is required is
year accounting periods. illustrated by comparing NetSolutions’ financial state-
• The fiscal year discussion was moved from the prior ments under the accrual basis (Chapters 1–4) with
edition’s Chapter 4. In addition, the notation of 20Y1, related cash basis financial statements.
20Y2, … is introduced for indicating years through- • To simplify and give the instructor more flexibility
out the text. in Chapter 6, the discussion of the accounting for
• In Chapter 2, the discussion on “Errors Not Affecting customer merchandise refunds, including the related
the Trial Balance” has been revised to better aid stu- adjusting entries, has been moved to Appendix 2 at
dent understanding and to simplify the preparation the end of the chapter.
of correcting journal entries. • For those instructors who prefer to cover sales dis-
• In Chapter 4, the Accounting Cycle illustration in counts using the gross method, Appendix 1, “Gross
Exhibit 8 has been revised to facilitate student review. Method of Recording Sales Discounts,” has been
added to the end of Chapter 6.
• In Chapter 4, the “Fiscal Year” discussion has been
moved to Chapter 1.
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
About the Authors
Carl S. Warren
Terry R. Spray/InHisImage Studios

Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens.
Dr. Warren has taught classes at the University of Georgia, University of Iowa, Michigan
State University, and University of Chicago. He focused his teaching efforts on principles of
accounting and auditing. Dr. Warren received his PhD from Michigan State University and his
BBA and MA from the University of Iowa. During his career, Dr. Warren published numerous
articles in professional journals, including The Accounting Review, Journal of Accounting
Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice &
Theory. Dr. Warren has served on numerous committees of the American Accounting
Association, the American Institute of Certified Public Accountants, and the Institute of
Internal Auditors. He also has consulted with numerous companies and public accounting
firms. His outside interests include handball, golf, skiing, backpacking, and fly-fishing.
Christine A. Jonick
Dr. Christine A. Jonick is Professor of Accounting at University of North Georgia, Gaines-
ville. She received her Ed.D from the University of Georgia, her MBA from Adelphi Univer-
Courtesy of Christine Jonick

sity, and her BA from State University of New York at Binghamton. Dr. Jonick has focused
her teaching efforts on principles of accounting and intermediate financial accounting. She
is the recipient of several teaching awards, including one for excellence in online instruction.
She has published accounting-related articles in research journals and a case study in the
Institute of Management Accountants (IMA) Educational Case Journal. Dr. Jonick serves on
numerous professional committees, is an active board member for the American Account-
ing Association SE, and is a recent past president of the Georgia Association of Accounting
Educators. Dr. Jonick has worked with accounting textbook publishers for over a decade as
a technology consultant, subject matter expert, and content developer. Her outside interests
include travel, biking, technology development, and family activities.
Jennifer S. Schneider
Jennifer S. Schneider is an Assistant Professor at the University of North Georgia, Gainesville.
Professor Schneider has taught principles of accounting, survey of accounting, principles of
finance, accounting information systems, and auditing. She is a Florida CPA and began her
Courtesy of Jennifer Schneider

career at PwC. She has 15+ years’ experience with Fortune 500 companies, primarily in audit
and financial/SEC reporting. Prior to coming to the University of North Georgia, Professor
Schneider taught at the University of Amsterdam. Her research interests are in the Scholarship
of Teaching and Learning. Professor Schneider has published several articles including an
article in the Institute of Management Accountants (IMA) Educational Case Journal. She
has also served as faculty advisor for Beta Alpha Psi, which is an international honors
organization for financial information students and professionals. She enjoys spending time
with her two sons, Luke and Graeme, both students at the University of Georgia, Athens.
vii
Contents
Chapter 1
Introduction to Double-Entry Accounting System 62
Balance Sheet Accounts 62
Accounting and Business 2 Income Statement Accounts 63
Owner Withdrawals 63
Nature of Business and Accounting 5 Normal Balances 63
Types of Businesses 5 Journalizing 64
Role of Accounting in Business 6
Integrity, Objectivity, and Ethics in Business:
Role of Ethics in Accounting and Business 6
Will Journalizing Prevent Fraud? 67
Journalizing and Posting to Accounts 68
Bernie Madoff 9
Opportunities for Accountants 9 Business Connection: Microsoft’s Unearned Revenue 70
Business Connection: Pathways Commission 10 Business Connection: Computerized Accounting
Systems 72
Generally Accepted Accounting Principles 10
Business Entity Concept 11 Trial Balance 78
International Connection: International Financial Errors Affecting the Trial Balance 79
Reporting Standards (IFRS) 11 Errors Not Affecting the Trial Balance 80
Time Period Concept 12 Financial Analysis and Interpretation:
Cost Concept 13 Horizontal Analysis 82
The Accounting Equation 13 Continuing Problem 106
Business Connection: The Accounting Equation 14
Business Transactions and the Accounting Chapter 3 The Adjusting Process 110
Equation 15
Nature of the Adjusting Process 113
Summary 18
Accrual and Cash Basis of Accounting 113
Financial Statements 19 Revenue and Expense Recognition 114
Income Statement 20 The Adjusting Process 114
Statement of Owner’s Equity 21 Types of Accounts Requiring Adjustment 115
Balance Sheet 21
Adjusting Entries for Accruals 116
Statement of Cash Flows 24
Accrued Revenues 117
Interrelationships Among Financial
Accrued Expenses 118
Statements 25
Financial Analysis and Interpretation: Business Connection: Earning Revenues
Ratio of Liabilities to Owner’s Equity 26 from Season Tickets 120
Continuing Problem 52 Adjusting Entries for Deferrals 120

Unearned Revenues 121
Prepaid Expenses 122
Chapter 2 Analyzing Transactions 56 Business Connection: Sports Signing Bonus 122
Using Accounts to Record Transactions 59 Integrity, Objectivity, and Ethics in Business:
Chart of Accounts 61 Free Issue 123
Business Connection: The Hijacking Receivable 61 Adjusting Entries for Depreciation 124
viii
Contents ix
Summary of Adjusting Process 126 Step 4. Enter the Adjusted Trial Balance 191
Step 5. Extend the Accounts to the Income
Business Connection: Microsoft’s Deferred Statement and Balance Sheet
Revenues 126 Columns 192
Adjusted Trial Balance 130 Step 6. Total the Income Statement and Balance
Sheet Columns, Compute the Net Income
Financial Analysis and Interpretation: or Net Loss, and Complete the
Vertical Analysis 131 Spreadsheet 192
Preparing the Financial Statements
Continuing Problem 156 from the Spreadsheet 193
Appendix 2: Why Is the Accrual Basis of
Accounting Required by GAAP? 195
Chapter 4
Completing the Cash Basis of Accounting 195
Accounting Cycle 160 Accrual Basis of Accounting 195
Illustration of Cash and Accrual Accounting 196
Flow of Accounting Information 163 Continuing Problem 223
Financial Statements 165 Comprehensive Problem 1 224
Income Statement 165
CEO’s Health? 167 Chapter 5 Accounting Systems 228
Statement of Owner’s Equity 167
Balance Sheet 168
Basic Accounting Systems 230
International Connection: International Manual Accounting Systems 231

Differences 169 Subsidiary Ledgers 231
Special Journals 231
Closing Entries 169 Revenue Journal 233
Journalizing and Posting Closing Entries 170 Cash Receipts Journal 236
Post-Closing Trial Balance 174 Accounts Receivable Control Account and
Subsidiary Ledger 238
Accounting Cycle 174 Purchases Journal 238
Illustration of the Accounting Cycle 177 Cash Payments Journal 241
Accounts Payable Control Account and Subsidiary
Step 1. Analyzing and Recording Transactions
Ledger 243
in the Journal 177
Step 2. Posting Transactions to the Ledger 179 Business Connection: Accounting Systems and Profit
Step 3. Preparing an Unadjusted Trial Bal- Measurement 244
ance 179
Computerized Accounting Systems 245
Step 4. Assembling and Analyzing Adjustment
Data 180 Business Connection: TurboTax 247
Step 5. Preparing an Optional End-of-Period
Spreadsheet 180 E-Commerce 247
Step 6. Journalizing and Posting Adjusting Integrity, Objectivity, and Ethics in Business: Online
Entries 180 Fraud 248
Step 7. Preparing an Adjusted Trial Balance 182
Step 8. Preparing the Financial Statements 182 Financial Analysis and Interpretation:
Step 9. Journalizing and Posting Closing Segment Analysis 248
Entries 184
Step 10. Preparing a Post-Closing Trial Balance 184
Financial Analysis and Interpretation: Chapter 6
Accounting for
Working Capital and Current Ratio 187
Merchandising Businesses 278
Appendix 1: End-of-Period Spreadsheet 188
Step 1. Enter the Title 189 Nature of Merchandising Businesses 280
Step 2. Enter the Unadjusted Trial Balance 189 Operating Cycle 280
Step 3. Enter the Adjustments 190 Financial Statements 281
x Contents
Business Connection: Comcast Versus

Chapter 7 Inventories 346
Lowe’s 282
Merchandising Transactions 282 Control of Inventory 348
Chart of Accounts for a Merchandising Safeguarding Inventory 348
Business 282 Reporting Inventory 349
Purchases Transactions 283
Inventory Cost Flow Assumptions 349
Sales Transactions 288
Business Connection: Pawn Stars and Specific
Identification 351
The Case of the Fraudulent Price Tags 291
Freight 292 Inventory Costing Methods Under a Perpetual
Summary: Recording Merchandise Inventory Inventory System 352
Transactions 294 First-In, First-Out Method 352
Dual Nature of Merchandise Transactions 294 Last-In, First-Out Method 353
Sales Taxes and Trade Discounts 296
International Connection: International Financial
Business Connection: Sales Taxes 297 Reporting Standards (IFRS) 355
The Adjusting Process 297 Weighted Average Cost Method 355
Adjusting Entry for Inventory Shrinkage 297 Business Connection: Computerized Perpetual
Integrity, Objectivity, and Ethics in Business: The Cost Inventory Systems 357
of Employee Theft 298 Inventory Costing Methods Under
Adjusting Entries for Customer Refunds and a Periodic Inventory System 357
Allowances 298 First-In, First-Out Method 357
Financial Statements for Last-In, First-Out Method 358
a Merchandising Business 299 Weighted Average Cost Method 359
Multiple-Step Income Statement 299 Comparing Inventory Costing Methods 360
Single-Step Income Statement 301
Statement of Owner’s Equity 301 Integrity, Objectivity, and Ethics in Business: Where’s
Balance Sheet 301 the Bonus? 361
The Closing Process 302
Reporting Merchandise Inventory
Financial Analysis and Interpretation: in the Financial Statements 361
Asset Turnover 303 Valuation at Lower of Cost or Market 361
Appendix 1: Gross Method of Recording Sales Business Connection: Good Samaritan 363
Discounts 305 Merchandise Inventory on the Balance Sheet 363
Transactions 305 Effect of Inventory Errors on the Financial
Statements 364
Adjusting Entry 306
Financial Analysis and Interpretation: Inventory
Subsequent Period 306 Turnover and Days’ Sales in Inventory 367
Comparison with the Net Method 307
Business Connection: Rapid Inventory
Appendix 2: Returns of Merchandise 308
at Costco 367
Appendix 3: The Periodic Inventory
Appendix: Estimating Inventory Cost 370
System 310
Retail Method of Inventory Costing 370
Chart of Accounts Under the Periodic Inventory Gross Profit Method of Inventory Costing 371
System 310
Recording Merchandise Transactions Under the
Periodic Inventory System 311
Adjusting Process Under the Periodic Inventory Chapter 8
Internal Control
System 311
Financial Statements Under the Periodic Inventory and Cash 396
System 312
Closing Entries Under the Periodic Inventory Sarbanes-Oxley Act 398
System 313
Internal Control 400
Comprehensive Problem 2 341 Objectives of Internal Control 400
Contents xi
Business Connection: Employee Fraud 400 Business Connection: Failure to Collect 452
Elements of Internal Control 400 Estimating Uncollectibles 452
Control Environment 401
Business Connection: Allowance Percentages Across
Risk Assessment 402
Control Procedures 402 Companies 457
Integrity, Objectivity, and Ethics in Business: Tips on Comparing Direct Write-Off

Preventing Employee Fraud in Small Companies 403 and Allowance Methods 457
Monitoring 404 Notes Receivable 458
Information and Communication 404 Characteristics of Notes Receivable 458
Limitations of Internal Control 405 Accounting for Notes Receivable 460
Cash Controls over Receipts and Payments 405 Reporting Receivables on the Balance Sheet 462
Business Connection: What Is Cryptocurrency? 406 Business Connection: Delta Air Lines 462
Control of Cash Receipts 406
Control of Cash Payments 408 Financial Analysis and Interpretation:
Accounts Receivable Turnover and
Business Connection: Mobile Payments 409
Days’ Sales in Receivables 463
Bank Accounts 409
Bank Statement 409
Using the Bank Statement as a Control over
Chapter 10Long-Term Assets:
Cash 412
Bank Reconciliation 412
Fixed and Intangible 490
Integrity, Objectivity, and Ethics in Business: Bank Nature of Fixed Assets 492
Error in Your Favor (or Maybe Not) 416 Classifying Costs 492
Special-Purpose Cash Funds 416 Business Connection: Fixed Assets 493

The Cost of Fixed Assets 494
Financial Statement Reporting of Cash 417 Leasing Fixed Assets 495
Business Connection: Managing Accounting for Depreciation 496
Apple’s Cash 418 Factors in Computing Depreciation Expense 496
Straight-Line Method 497
Financial Analysis and Interpretation:
Units-of-Activity Method 499
Ratio of Cash to Monthly Cash Expenses 418 Double-Declining-Balance Method 501
Business Connection: Microsoft Corporation 420 Comparing Depreciation Methods 503
Partial-Year Depreciation 503
Business Connection: Depreciating Animals 504
Chapter 9 Receivables 444 Revising Depreciation Estimates 505
Repair and Improvements 506
Classification of Receivables 446 Integrity, Objectivity, and Ethics in Business: Capital
Accounts Receivable 446 Crime 507
Notes Receivable 446
Other Receivables 447 Disposal of Fixed Assets 508
Discarding Fixed Assets 508
Uncollectible Receivables 447 Selling Fixed Assets 509
Business Connection: Warning Signs 448 Business Connection: Downsizing 510
Direct Write-Off Method Natural Resources 511
for Uncollectible Accounts 448
Intangible Assets 512
Allowance Method for Uncollectible Patents 512
Accounts 449 Copyrights and Trademarks 513
Goodwill 513
Collecting Past Due Accounts 450 International Connection: International Financial
Write-Offs to the Allowance Account 450 Reporting Standards (IFRS) 515
xii Contents
Financial Reporting for Long-Term Assets: Fixed Chapter 12 Accounting for

and Intangible 515
Partnerships and Limited
Financial Analysis and Interpretation: Liability Companies 588
Fixed Asset Turnover Ratio 516
Fixed Asset Turnover Ratio 516 Proprietorships, Partnerships, and Limited
Business Connection: Hub-and-Spoke or Point-to- Liability Companies 590
Point? 517 Proprietorships 590
Partnerships 591
Appendix: Exchanging Similar Fixed Assets 518
Gain on Exchange 518 Business Connection: Breaking Up Is Hard To Do 591
Loss on Exchange 519 Limited Liability Companies 592
Comparing Proprietorships, Partnerships,
and Limited Liability Companies 592
Chapter 11Current Liabilities Business Connection: Organizational Forms in the

Accounting Industry 592
and Payroll 540
Forming a Partnership and Dividing Income 593
Current Liabilities 542 Forming a Partnership 593
Accounts Payable 542 Dividing Income 594
Current Portion of Long-Term Debt 542 Integrity, Objectivity, and Ethics in Business: Tyranny
Short-Term Notes Payable 543
of the Majority 596
Payroll and Payroll Taxes 545
Partner Admission and Withdrawal 597
Liability for Employee Earnings 545
Admitting a Partner 597
Deductions from Employee Earnings 545
Withdrawal of a Partner 603
Computing Employee Net Pay 548
Death of a Partner 603
Liability for Employer’s Payroll Taxes 549
Liquidating Partnerships 603
Business Connection: The Most You
Gain on Realization 604
Will Ever Pay 549
Loss on Realization 606
Accounting Systems for Payroll Loss on Realization—Capital Deficiency 607
and Payroll Taxes 549 Statement of Partnership Equity 610
Payroll Register 550
Employee’s Earnings Record 552 Financial Analysis and Interpretation:
Payroll Checks 554 Revenue per Employee 610
Computerized Payroll System 555
Internal Controls for Payroll Systems 555
Integrity, Objectivity, and Ethics in Business: Chapter 13Corporations:
Overbilling Clients 556
Organization, Stock Transactions,
Employees’ Fringe Benefits 556 and Dividends 632
Vacation Pay 556
Pensions 557 Nature of a Corporation 634
Postretirement Benefits Other Than Pensions 558 Characteristics of a Corporation 634
Current Liabilities on the Balance Sheet 558 Forming a Corporation 635
Contingent Liabilities 559 Business Connection 636
Probable and Estimable 559
Probable and Not Estimable 560 Stockholders’ Equity 637
Reasonably Possible 560
Paid-In Capital from Stock 638
Remote 560
Characteristics of Stock 638
Financial Analysis and Interpretation: Classes of Stock 639
Quick Ratio 561
Business Connection: You Have No Vote 639
Comprehensive Problem 3 582 Issuing Stock 640
Contents xiii
Premium on Stock 641 Reporting Long-Term Liabilities 695

No-Par Stock 642
Integrity, Objectivity, and Ethics in Business: The Times Interest Earned Ratio 695
Professor Who Knew Too Much 643
Appendix 1: Present Value Concepts and
Accounting for Dividends 643
Pricing Bonds Payable 697
Cash Dividends 643
Present Value Concepts 697
Stock Dividends 645
Pricing Bonds 700
Stock Splits 646
Appendix 2: Interest Rate Method of
Business Connection: Buffett on Stock Splits 647 Amortization 701
Treasury Stock Transactions 648 Amortization of Discount by the Interest
Method 701
Business Connection: Treasury Stock or Amortization of Premium by the Interest
Dividends? 649 Method 702
Reporting Stockholders’ Equity 649
Stockholders’ Equity on the Balance Sheet 649
Reporting Retained Earnings 651 Chapter 15 Investments 723
Statement of Stockholders’ Equity 652
International Connection: International Financial Why Companies Invest 725
Reporting Standards for SMEs 653 Investing Cash in Current Operations 725
Reporting Stockholders’ Equity for Mornin’ Joe 653 Investing Cash in Temporary Investments 725
Investing Cash in Long-Term Investments 726
Earnings per Share 655 Equity Investments 726
Fair Value Method: Less Than 20%
Ownership 726
Chapter 14
Long-Term Liabilities: Equity Method: Between 20%–50% Ownership 729
Consolidation: More Than 50% Ownership 731
Bonds and Notes 679
Business Connection: More Cash Means More
Financing Corporations 681 Investments for Drug Companies 731
Nature of Bonds Payable 683 Held-to-Maturity Investments 731

Bond Characteristics and Terminology 684 Purchase of Bonds 732
Proceeds from Issuing Bonds 684 Receipt of Interest 732
Sale of Bonds 733
Business Connection: Investor Bond Price Risk 685
Reporting on Financial Statements 734
Accounting for Bonds Payable 685
Trading and Available-for-Sale Investments 734
Bonds Issued at Face Amount 685
Bonds Issued at a Discount 686 Trading Securities 735
Amortizing a Bond Discount 687 Available-for-Sale Securities 736
Business Connection: U.S. Government Debt 688 Integrity, Objectivity, and Ethics in Business: Socially
Bonds Issued at a Premium 689 Responsible Investing 736
Amortizing a Bond Premium 690 Summary 738
Business Connection: Bond Ratings 691 Business Connection: Warren Buffett: The Sage of
Bond Redemption 691 Omaha 740
Installment Notes 692 Financial Analysis and Interpretation:
Issuing an Installment Note 693 Dividend Yield 740
Annual Payments 693
Appendix: Comprehensive Income 741
Integrity, Objectivity, and Ethics in Business: The
Ratings Game 695 Comprehensive Problem 4 761
xiv Contents
Chapter 16
Reporting Cash Flows from (used for) Operating
Statement of Cash Activities—Direct Method 791
Flows 765
Reporting Cash Flows 767 Chapter 17Financial Statement
Cash Flows from (used for) Operating
Activities 768 Analysis 821
Business Connection: Cash Crunch! 770 Analyzing and Interpreting Financial
Cash Flows from (used for) Investing Statements 823
Activities 770
The Value of Financial Statement Information 823
Cash Flows from (used for) Financing Activities 770
Techniques for Analyzing Financial Statements 824
Noncash Investing and Financing Activities 770
Format of the Statement of Cash Flows 771 Basic Analytical Methods 824
Cash Flow per Share 771 Horizontal Analysis 824
Vertical Analysis 827
Cash Flows from (used for) Operating
Common-Sized Statements 828
Activities 772
Net Income 773 Analyzing Liquidity 829
Adjustments to Net Income 774 Current Position Analysis 830
Accounts Receivable Analysis 832
Integrity, Objectivity, and Ethics in Business: Credit Inventory Analysis 833
Policy and Cash Flow 777
Business Connection: Flying Off the Shelves 835
Cash Flows from (used for) Investing
Activities 778 Analyzing Solvency 835
Land 778 Ratio of Fixed Assets to Long-Term Liabilities 836
Building and Accumulated Ratio of Liabilities to Stockholders’ Equity 836
Depreciation—Building 779 Times Interest Earned 837
Cash Flows from (used for) Financing Business Connection: Liquidity Crunch 838
Activities 779 Analyzing Profitability 838
Bonds Payable 780 Asset Turnover 838
Common Stock 780 Return on Total Assets 839
Dividends and Dividends Payable 781 Return on Stockholders’ Equity 840
Prepare a Statement of Cash Flows—Indirect Business Connection: Gearing for Profit 841
Method 782 Return on Common Stockholders’ Equity 841
International Connection: IFRS for Statement of Cash Earnings per Share on Common Stock 842
Flows 783 Price-Earnings Ratio 843
Dividends per Share 844
Financial Analysis and Interpretation: Dividend Yield 845
Free Cash Flow 783 Business Connection: Investing for Yield 845
Business Connection: Growing Pains 784 Summary of Analytical Measures 845
Appendix 1: Spreadsheet (Work Sheet) for Corporate Annual Reports 847

Statement of Cash Flows—The Indirect Method 785 Management Discussion and Analysis 847
Analyzing Accounts 785 Report on Internal Control 847
Retained Earnings 785 Integrity, Objectivity, and Ethics in Business:
Other Accounts 787 Characteristics of Financial Statement Fraud 847
Preparing the Statement of Cash Flows 787
Report on Fairness of the Financial Statements 848
Appendix 2: Preparing the Statement of Cash Appendix: Unusual Items on the Income
Flows—The Direct Method 788 Statement 848
Cash Received from Customers 788
Unusual Items Affecting the Current Period’s
Cash Paid for Merchandise 789
Cash Paid for Operating Expenses 789
Unusual Items Affecting the Prior Period’s
Gain on Sale of Land 790
Interest Expense 790
Cash Paid for Income Taxes 790 Nike, Inc., Problem 877
Contents xv
Chapter 18
Introduction to Job Order Costing for Decision Making 938
Managerial Accounting 881 Job Order Cost Systems for Service

Businesses 939
Managerial Accounting 883 Types of Service Businesses 939
Differences Between Managerial and Financial Flow of Costs in a Service Job Order Cost
Accounting 883 System 940
The Management Accountant in the Organization 884 Service Focus: Job Order Costing in a Law Firm 941
The Management Process 886
Business Connection: Line and Staff for Service
Companies 886 Chapter 20 Process Cost Systems 966
Uses of Managerial Accounting Information 887
Manufacturing Operations: Process Cost Systems 968
Costs and Terminology 888 Integrity, Objectivity, and Ethics in Business: On Being
Direct and Indirect Costs 889 Green 968
Manufacturing Costs 890 Comparing Job Order and Process Cost Systems 969
Business Connection: Overhead Costs 891 Cost Flows for a Process Manufacturer 971
Sustainability and Accounting 894 Business Connection: Sustainable Papermaking 973

Sustainability 895 Cost of Production Report 974
Eco-Efficiency Measures in Managerial Step 1: Determine the Units to Be Assigned
Accounting 895 Costs 974
Integrity, Objectivity, and Ethics in Business: Step 2: Compute Equivalent Units of
Environmental Managerial Accounting 896 Production 976
Step 3: Determine the Cost per Equivalent Unit 979
Financial Statements for a Step 4: Allocate Costs to Units Transferred
Manufacturing Business 896 Out and Partially Completed Units 980
Balance Sheet for a Manufacturing Business 896 Preparing the Cost of Production Report 982
Income Statement for a Manufacturing Business 896
Journal Entries for a Process Cost System 983
Service Focus: Managerial Accounting in the Service
Service Focus: Costing the Power Stack 986
Industry 901
Using the Cost of Production
Report for Decision Making 987
Chapter 19
Cost per Equivalent Unit Between Periods 987
Job Order Costing 922 Cost Category Analysis 987
Yield 988
Cost Accounting Systems Overview 924
Job Order Cost Systems 924 Lean Manufacturing 989
Process Cost Systems 924 Traditional Production Process 989
Lean Production Process 990
Job Order Cost Systems for
Manufacturing Businesses 925 Appendix: Weighted Average Cost Method 991
Materials 925 Determining Costs Using the Weighted Average
Cost Method 991
Integrity, Objectivity, and Ethics in Business: The Cost of Production Report 993
Phony Invoice Scams 927
Factory Labor 928
Business Connection: 3D Printing 929 Chapter 21Cost-Volume-Profit
Factory Overhead 929
Analysis 1018
Business Connection: Advanced Robotics 930
Work in Process 934 Cost Behavior 1020
Finished Goods 935 Variable Costs 1020
Sales and Cost of Goods Sold 936 Fixed Costs 1022
Period Costs 936 Mixed Costs 1022
Summary of Cost Flows for Legend Guitars 936 Summary of Cost Behavior Concepts 1025
xvi Contents
Business Connection: Booking Fees 1026 Business Connection: Mad Men 1089
Budgeted Income Statement 1089
Cost-Volume-Profit Relationships 1026
Contribution Margin 1027 Financial Budgets 1090
Contribution Margin Ratio 1027 Cash Budget 1090
Unit Contribution Margin 1028 Capital Expenditures Budget 1093
Budgeted Balance Sheet 1094
Mathematical Approach to
Cost-Volume-Profit Analysis 1029
Break-Even Point 1029
Target Profit 1033 Chapter 23
Evaluating Variances
Business Connection: Airline Industry Break-Even 1034 from Standard Costs 1122
Integrity, Objectivity, and Ethics in Business: Orphan Standards 1124
Drugs 1035 Setting Standards 1124
Graphic Approach to Types of Standards 1125
Reviewing and Revising Standards 1125
Cost-Volume-Profit Analysis 1035
Criticisms of Standard Costs 1125
Cost-Volume-Profit (Break-Even) Chart 1035
Profit-Volume Chart 1037 Integrity, Objectivity, and Ethics in Business: Company
Use of Spreadsheets in Cost-Volume-Profit Reputation: The Best of the Best 1125
Analysis 1040
Assumptions of Cost-Volume-Profit Analysis 1040 Business Connection: Standard Costing in Action:
Expanding Brewing Operations 1126
Service Focus: Profit, Loss, and Break-Even in Major
League Baseball 1040 Budgetary Performance Evaluation 1126
Budget Performance Report 1127
Special Cost-Volume-Profit Relationships 1040 Manufacturing Cost Variances 1127
Sales Mix Considerations 1041
Operating Leverage 1042 Direct Materials and Direct Labor
Margin of Safety 1044 Variances 1129
Direct Materials Variances 1129
Appendix: Variable Costing 1045
Service Focus: Standard Costing in the Restaurant
Industry 1131
Chapter 22
Direct Labor Variances 1132
Budgeting 1072
Factory Overhead Variances 1134
Nature and Objectives of Budgeting 1074 The Factory Overhead Flexible Budget 1134
Objectives of Budgeting 1074 Variable Factory Overhead Controllable Vari-
Human Behavior and Budgeting 1075 ance 1136
Fixed Factory Overhead Volume Variance 1137
Integrity, Objectivity, and Ethics in Business: Reporting Factory Overhead Variances 1139
Budget Games 1076 Factory Overhead Account 1140
Budgeting Systems 1076 Recording and Reporting Variances
Static Budget 1077 from Standards 1141
Service Focus: Film Budgeting 1078 Nonfinancial Performance Measures 1144
Flexible Budget 1078
Computerized Budgeting Systems 1079 Comprehensive Problem 5 1164
Master Budget 1080
Operating Budgets 1080 Chapter 24
Decentralized
Sales Budget 1080
Production Budget 1082 Operations 1170
Direct Materials Purchases Budget 1082
Direct Labor Cost Budget 1084 Centralized and Decentralized
Factory Overhead Cost Budget 1086 Operations 1172
Cost of Goods Sold Budget 1086 Advantages of Decentralization 1172
Selling and Administrative Expenses Budget 1088 Disadvantages of Decentralization 1173
Contents xvii
Business Connection: Dover Corporation: Many Business Connection: The ABC’s of Schwab 1237
Pieces, One Picture 1173 Dangers of Product Cost Distortion 1238
Responsibility Accounting 1173
Appendix: Total and Variable Cost Concepts to
Responsibility Accounting for Cost Centers 1174 Setting Normal Price 1239
Total Cost Concept 1239
Responsibility Accounting for Profit
Variable Cost Concept 1242
Centers 1176
Service Department Cost Allocations 1176
Profit Center Reporting 1178
Chapter 26Capital Investment
Responsibility Accounting
for Investment Centers 1179
Analysis 1270
Return on Investment 1180 Nature of Capital Investment Analysis 1272
Business Connection: Coca-Cola Company: Go West Business Connection: Business Use of Investment
Young Man 1182 Analysis Methods 1273
Residual Income 1183
The Balanced Scorecard 1185 Methods Not Using Present Values 1273
Average Rate of Return Method 1273
Service Focus: Turning Around Charles Schwab 1186
Cash Payback Method 1274
Transfer Pricing 1186 Methods Using Present Values 1276
Market Price Approach 1187
Present Value Concepts 1276
Negotiated Price Approach 1188
Net Present Value Method and Index 1279
Cost Price Approach 1190
Internal Rate of Return Method 1281
Integrity, Objectivity, and Ethics in Business: The Business Connection: Panera Bread Rate of Return 1283
Ethics of Transfer Prices 1191
Additional Factors in Capital
Investment Analysis 1284
Chapter 25Differential Analysis, Income Tax 1284
Unequal Proposal Lives 1284
Product Pricing, and Activity-Based Lease Versus Purchase 1286
Costing 1216 Uncertainty 1286
Service Focus: If You Build It, They Will Come 1286
Differential Analysis 1218 Changes in Price Levels 1287
Lease or Sell 1220 Qualitative Considerations 1287
Discontinue a Segment or Product 1221 Capital Investment for Sustainability 1287
Make or Buy 1223
Replace Equipment 1224 Integrity, Objectivity, and Ethics in Business:
Process or Sell 1226 Assumption Fudging 1288
Accept Business at a Special Price 1227
Capital Rationing 1288
Business Connection: 60% Off! 1228
Setting Normal Product Selling Prices 1229
Mornin’ Joe MJ-1
Service Focus: Revenue Management 1230
Product Cost Concept 1230
Financial Statements for Mornin’ Joe MJ-1
Price Fixing 1232 Appendix A: Interest Tables A-2
Target Costing 1232 Appendix B: Revenue Recognition B-2
Production Bottlenecks 1233 Appendix C: Selected Excerpts from Nike Inc., Form
Activity-Based Costing 1235 10-K for the Fiscal Year Ended May 31, 2018 C-1
Estimated Activity Costs 1235
Glossary G-1
Activity Rates 1236
Overhead Allocation 1236 Index I-1
CHAPTER
1 Introduction to Accounting
and Business
Chapter 1 Transactions
Accounting System
Accounting Equation
Assets 5 Liabilities 1 Owner’s Equity
Chapter 2 Account
Debits Credits
Rules of Debit and Credit

BALANCE SHEET ACCOUNTS
ASSETS = LIABILITIES + OWNER’S EQUITY

Asset Accounts Liability Accounts Owner’s Capital Account
Debit for Credit for Debit for Credit for Debit for Credit for
increases (+) decreases (–) decreases (–) increases (+) decreases (–) increases (+)
Balance Balance Balance
Owner’s Drawing Income Statement Accounts

Account Revenue Accounts
Debit for Credit for Debit for Credit for
increases (+) decreases (–) decreases (–) increases (+)
Balance Balance
Expense Accounts
Debit for Credit for
increases (+) decreases (–)
Balance
Unadjusted Trial Balance

Total Debit Balances = Total Credit Balances
CHAPTER
1
Chapter 3
Adjusting Entries
Unadjusted Adjusting Adjusted

Accounts Journal Entries Accounts
XXX XXX Accrued Revenues Unadj. Balances XXX XXX
Accrued Expenses Adjustments XXX XXX
Unearned Revenues Adj. Balances XXX XXX
Unadjusted Prepaid Expenses
Trial Balance Depreciation
Adjusted Trial Balance
Total Debit = Total Credit
Balances Balances
Total Debit Total Credit
Balances
= Balances
Chapter 4 Adjusted Accounts

XXX XXX
Adjusted Balances
Financial Statements
Income Statement Statement of Owner’s Equity Balance Sheet
Closing Entries
Adjusted Closing Income Statement
Accounts Journal Entries and Drawing Accounts
XXX XXX 0 0
Adjusted Zero Balances

Balances
Balance Sheet
Total Debit = Total Credit Accounts
Balances Balances
XXX XXX
Post-Closing
Trial Balance
Total Debit = Total Credit
Balances Balances
CHAPTER
1
PHOTOMIX-COMPANY/PIXABAY
Twitter
W hen two teams pair up for a game of football, there
is often a lot of noise. The band plays, the fans
cheer, and fireworks light up the scoreboard. Obviously,
Twitter, Inc. is one of the most visible companies
on the Internet. It provides a real-time information net-
work where members can post messages, called tweets,
the fans are committed and care about the outcome of for free. Millions post tweets every day throughout the
the game. Just like fans at a football game, the owners of world.
a business want their business to “win” against their com- Do you think Twitter is a successful company? Does it
petitors in the marketplace. While having your football make money? How would you know? Accounting helps
team win can be a source of pride, winning in the mar- to answer these questions.
ketplace goes beyond pride and has many tangible ben- This textbook introduces you to accounting, the lan-
efits. Companies that are winners are better able to serve guage of business. Chapter 1 begins by discussing what a
customers, provide good jobs for employees, and make business is, how it operates, and the role that accounting
money for their owners. plays.
Link to Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 6, 12, 14, 20, 24
LEARNING OBJECTIVES
After studying this chapter, you should be able to: Example Exercises (EE) are shown in red.
OBJ. 1 Describe the nature of business and the role of OBJ. 5 Describe the financial statements of a
accounting and ethics in business. proprietorship and explain how they
interrelate.
Nature of Business and Accounting
Types of Businesses Financial Statements
Role of Accounting in Business Income Statement EE 1-4
Role of Ethics in Accounting and Business Statement of Owner’s Equity EE 1-5
Opportunities for Accountants Balance Sheet EE 1-6
Statement of Cash Flows EE 1-7
Interrelationships Among
OBJ. 2 Summarize the development of accounting
Financial Statements
principles and relate them to practice.
Generally Accepted Accounting Principles
Business Entity Concept
OBJ. 6 Describe and illustrate the use of the ratio of
liabilities to owner’s equity in evaluating a
Time Period Concept company’s financial condition.
Cost Concept EE 1-1
Ratio of Liabilities to Owner’s Equity
OBJ. 3 State the accounting equation and define each Computing and Interpreting Ratio
element of the equation. of Liabilities to Owner’s Equity EE 1-8
The Accounting Equation
Solving the Accounting Equation EE 1-2
OBJ. 4 Describe and illustrate how business

transactions can be recorded in terms of
the resulting change in the elements of the
accounting equation.
Business Transactions and the
Accounting Equation
At a Glance 1 Page 28
Recording Transactions EE 1-3
Nature of Business and Accounting OBJ. 1

Describe the
nature of business
and the role of accounting
A business1 is an organization in which basic resources (inputs), such as materials and ethics in business.
and labor, are assembled and processed to provide goods or services (outputs) to cus-
tomers. Businesses come in all sizes, from a local coffee house to Starbucks, which
sells over $24 billion of coffee and related products each year.
The objective of most businesses is to earn a profit . Profit is the difference
between the amounts received from customers for goods or services and the amounts
paid for the inputs used to provide the goods or services. This text focuses on busi-
nesses operating to earn a profit. However, many of the same concepts and principles
also apply to not-for-profit organizations such as hospitals, churches, and government
agencies.
Types of Businesses
Three types of businesses operating for profit include service, merchandising, and
manufacturing businesses. Some examples of each type of business follow:
• Service businesses provide services rather than products to customers.
Delta Air Lines (transportation services)
The Walt Disney Company (entertainment services)
1 A complete glossary of terms appears at the end of the text.
6 Chapter 1 Introduction to Accounting and Business
• Merchandising businesses sell products they purchase from other businesses to

Link to Twitter customers.
Wal-Mart Stores, Inc. (general merchandise)
Twitter is a service Amazon.com (general merchandise)
company that • Manufacturing businesses convert basic inputs into products that are sold to customers.
provides a platform Ford Motor Co. (cars, trucks, vans)
for individuals to Dell Inc. (personal computers)
send text messages
called tweets.
Role of Accounting in Business
The role of accounting in business is to provide information for managers to use in
operating the business. In addition, accounting provides information to other users in
assessing the economic performance and condition of the business.
Accounting is an Thus, accounting can be defined as an information system that provides reports
information system that
to users about the economic activities and condition of a business. You could think of
provides reports to users
about the economic accounting as the “language of business.” This is because accounting is the means by
activities and condition of which businesses’ financial information is communicated to users.
a business. The process by which accounting provides information to users is as follows:
1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
As illustrated in Exhibit 1, users of accounting information can be divided into two
groups: internal users and external users.
Managerial Accounting Internal users of accounting information include man-

agers and employees. These users are directly involved in managing and operating
the business. The area of accounting that provides internal users with information is
called managerial accounting or management accounting.
The objective of managerial accounting is to provide relevant and timely information
for managers’ and employees’ decision-making needs. Oftentimes, such information is
sensitive and is not distributed outside the business. Examples of sensitive information
might include information about customers, prices, and plans to expand the business.
Managerial accountants employed by a business are employed in private accounting.
Financial Accounting External users of accounting information include investors,

Link to Twitter creditors, customers, and the government. These users are not directly involved in
One of the ways
managing and operating the business. The area of accounting that provides external
Twitter provides users with information is called financial accounting.
information to its The objective of financial accounting is to provide relevant and timely information
investors is by for the decision-making needs of users outside the business. For example, financial
publishing an annual reports on the operations and condition of the business are useful for banks and
report, which includes other creditors in deciding whether to lend money to the business. General-purpose
general-purpose financial statements are one type of financial accounting report that is distributed to
financial statements. external users. The term general-purpose refers to the wide range of decision-making
needs that these reports are designed to serve. Later in this chapter, general-purpose
financial statements are described and illustrated.
Role of Ethics in Accounting and Business

The objective of accounting is to provide relevant, timely information for user decision
ETHICS making. Accountants must behave in an ethical manner so that the information they
provide users will be trustworthy and, thus, useful for decision making. Managers
and employees must also behave in an ethical manner in managing and operating a
business. Otherwise, no one will be willing to invest in or loan money to the business.
Chapter 1 Introduction to Accounting and Business 7
Accounting as an Information System EXHIBIT 1
1
Identify
Users
Internal Users External Users

Company Company
2
Assess
Users’
Information
Managers, Needs Investors, Creditors,
Employees Customers, Government
3 4
Design Record
Accounting Economic
System Data
5
Prepare
Accounting
Reports
Ethics are moral principles that guide the conduct of individuals. Unfortunately,
business managers and accountants sometimes behave in an unethical manner. Many
of the managers of the companies listed in Exhibit 2 engaged in accounting or busi-
ness fraud. These ethical violations led to fines, firings, and lawsuits. In some cases,
managers were criminally prosecuted, convicted, and sent to prison.
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sometimes. For the most part we lay ourselves out to answer
Tommy’s questions so far as we are able, and are sadly ashamed
that we are so soon floored by his insatiable curiosity about natural
objects and phenomena. Tommy has his reward. The most
surprising educational feat accomplished amongst us is the amount
of knowledge, about everything within his range, which Tommy has
acquired by the end of his sixth year. “Why, he knows as much as I
do, about”—this, and that, and the other, says his astonished and
admiring father. Take him to the seaside, and in a week he will tell
you all about trawling and mackerel fishing; the ways of the fisher-
folk, and all that his inquisitive mind can find out unaided. He would
tell all about sand, and shells, and tides, and waves, only, poor little
boy, he must have help towards this manner of knowledge, and there
is no one to give it to him. However, he finds out all that he can about
all that he sees and hears, and does amass a surprising amount of
exact knowledge about things and their properties.
When Tommy goes to school, his parents find themselves
relieved of the inconvenience of his incessant Why? They are
probably so well pleased to be let off that it does not occur to them to
ask themselves Why Tommy no longer wonders Why? Up to this
period nature has been active. She has been allowed to stimulate
that one of his desires most proper to minister to his mental growth,
just as, if let alone, she would give him that hearty appetite which
should promote his physical growth. She has it all her own way. The
desire of knowledge is that spring of action most operative in
Tommy’s childhood. But he goes to school. Knowledge is a pure
delight to Tommy. Let his lessons approach him on the lines of his
nature—not on the lines proper for certain subjects of instruction—
and the little boy has no choice. He cannot help learning and loving
to learn, “‘cos ’tis his nature to.”
This, of presenting knowledge to Tommy on the lines of his
nature, is, however, a difficult and delicate task. Not every
schoolmaster, any more than every parent, is keen to give Tommy
what he wants in this matter of needful knowledge. So, once upon a
time, let us suppose, there arose a pedagogue to whom was
discovered a new and easier way. The morning had seen the poor
man badly baffled by the queries of boys who wanted to know. How
was a man, who had pretty well done with fresh studies for his own
part, to keep up with these eager intelligences. In a vision of the
night it is disclosed to Cognitus that there is another and an easier
way. The desire of knowledge is not the only desire active in the
young bosom. Just as much as he wants to know, he wants to excel,
to do better than the rest. “Every soul of them wants to be first in one
way or another—first in games, if not in class.” Now, Cognitus was a
philosopher; he knew that, as a rule, but one desire is supremely
active at one time in the breast of boy or man. Kindle their emulation,
and all must needs do the same thing in the same way to see who
can do it best. The boys will no longer want to know; they will get
their due share of learning in regular ways, and really get on better
than if they were moved by the restless spirit of inquiry. Eureka! A
discovery; honour and renown for master and boys,—no need for
cane or imposition, for emulation is the best of all disciplinarians,—
and steady-going, quiet work, without any of the fatiguing excursions
into new fields to which the craving for knowledge leads. “How
pleased the parents will be, too,” says Cognitus, for he knows that
paternal love, now and then, looks for a little sustenance from
paternal vanity, that the child who does well is dear. Nay, who knows
but the far-seeing Cognitus beheld, as in a vision, the scholarships
and money awards which should help to fill the pocket of Paternus,
or should, any way, lessen the drain thereupon. Here, indeed, is a
better way, upon which Paternus and Cognitus may well consent to
walk together. Every one is happy, every one content, nobody
worried, a great deal of learning got in. What would you have more?
Just one thing, honoured Cognitus, that keen desire for knowledge,
that same incessant Why? with which Tommy went to school, and
which should have kept him inquisitive about all things good and
great and wise throughout the years given to him wherein to lay the
groundwork of character, the years of his youth.
We cannot put our finger upon Cognitus, and are pretty sure that
he arrived by a consensus of opinion, and through considerable
urgency on the part of parents. No one is to blame for a condition of
things which is an enormous advance upon much of what went
before. Only, knowledge is advancing, and it is full time that we
reconsider our educational principles and recast our methods. We
absolutely must get rid of the competitive examination system if we
would not be reduced to the appalling mediocrity which we see in
China, for example, to have befallen an examination-ridden empire.
Probably the world has never seen a finer body of educationalists
than those who at the present moment man our schools, both Boys’
and Girls’. But the originality, the fine initiative, of these most able
men and women is practically lost. The schools are examination-
ridden, and the heads can strike out no important new lines. Let us
begin our efforts by believing in one another, parents in teachers and
teachers in parents. Both parents and teachers have the one desire,
the advance of the child along the lines of character. Both groan
equally under the limitations of the present system. Let us have
courage, and united and concerted action will overthrow this
Juggernaut that we have made.
CHAPTER XXI
HERBARTIAN PEDAGOGICS
We in England require, every now and then, to pull ourselves
together, and to ask what they are doing on the continent in the way
of education. We still hark back to the older German educational
reformers. We may not know much of Comenius, Basedow, Ratich;
we do know something of the reformers next in descent, Pestalozzi
and Froebel; but how much do we know of the thought of Johann
Friedrich Herbart, the lineal successor of these, who has largely
displaced his predecessors in the field of Pedagogics.
How entirely German educators work upon Herbart, and Herbart
only, is proved by the existence of a Herbartian educational literature
greatly more extensive than the whole of our English educational
literature put together.
A little volume on the “Outlines of Pedagogics,”[16] by Professor
W. Rein, of the University of Jena, is offered to us by the translators,
C. C. and Ida J. Van Liew, as a brief introduction to the study of
Herbart and his school, the author making due allowance for the
advances that have been made in the fifty years that have elapsed
since Herbart’s death.
As Herbart and his interpreters represent the most advanced
school of educational thought on the continent, it will, perhaps, be
interesting to our readers to make a slight comparison between what
we call P.N.E.U. Philosophy and the school of thought which
exercises such immense influence in Germany.
One of the most characteristic features of Herbart’s thinking, and
that feature of it which constitutes a new school of educational
thought, is, that he rejects the notion of separate mental faculties.
The earlier reformers, notably Pestalozzi and Froebel, divide the
faculties up with something of the precision of a phrenologist, and a
chief business of education is, according to them, “to develop the
faculties.” There is a certain pleasing neatness in this idea which is
very attractive. We want to know, definitely, what we have to do. Why
develop the perceptive faculties here, the conceptive there, the
judgment in this lesson, the affections in the other, until you have
covered the whole ground, giving each so-called faculty its due
share of developmental exercise! But, says Herbart, we have
changed all that. The mind, like Wordsworth’s cloud, moves
altogether when it moves at all.
Now this appears to be but a slight fundamental difference, but it
is one upon the recognition of which education changes front. The
whole system of beautifully organised lessons, whose object is to
develop this or that, is called into question. For the raison d’être of
specialised intellectual gymnastics is gone when we no longer
recognise particular “muscles” of the mind to be developed. The aim
of education must be something quite other, and, if the aim is other,
the methods must be altered, for what is method but a way to an
end. So far we are entirely with Herbart; we do not believe in the
“faculties;” therefore we do not believe in the “development of the
faculties;” therefore we do not regard lessons as instruments for this
“development”: in fact, our whole method of procedure is altered.
Again, we are with the philosopher in his recognition of the force
of an idea, and especially of those ideas which are, as we phrase it,
in the air at any given moment. “Both the circle of the family and that
of social intercourse are subjected to forces that are active in the
entire social body, and that penetrate the entire atmosphere of
human life in invisible channels. No one knows whence these
currents, these ideas arise; but they are there. They influence the
moods, the aspirations, and the inclinations of humanity, and no one
however powerful can withdraw himself from their effects; no
sovereign’s command makes its way into their depths. They are
often born of a genius to be seized upon by the multitude that soon
forgets their author; then the power of the thought that has thus
become active in the masses again impels the individual to energetic
resolutions: in this manner it is constantly describing a remarkable
circle. Originating with those that are highly gifted, these thoughts
permeate all society, reaching, in fact, not only its adult members,
but also through these its youth, and appearing again in other highly
gifted individuals in whom they will perhaps have been elevated to a
definite form.
“Whether the power of these dominant ideas is greater in the
individual, or in the body of individuals as a whole, is a matter of
indifference here. Be that as it may, it cannot be denied that their
effect upon the one is manifested in a reciprocal action upon the
other, and that their influence upon the younger generation is
indisputable.”
We entirely agree that no one can escape the influence of this
Zeitgeist, and that the Zeitgeist is, in fact, one of the most powerful of
the occult educational influences, and one which parents and all who
have the training of children will do well to reckon with in the
adjustment of their work.
Nature, family, social intercourse, this Zeitgeist, the Church and
the State, thus Professor Rein, as interpreting Herbart, sums up the
schoolmasters under whose influences every child grows up; a
suggestive enumeration we should do well to consider. “Erziehung
ist Sache der Familien; von da geht sie aus und dahin kehrt sie
grössenteils zurück,” says Herbart. He considers, as do we, that by
far the most valuable part of education is carried on in the family,
because of the union of all the members under a common
parentage, of the feeling of dependence upon a head, of the very
intimate knowledge to be gained of the younger members.
“The members of the family look confidently to the head; and this
sense of dependence favours, at the same time, the proper
reception of that which is dearest to mankind, namely, the religious
feeling. If the life of the family is permeated by a noble piety, a
sincere religious faith will take root in the hearts of the children.
Faithful devotion to the guide of the youth also calls forth faithful
devotion to Him who controls human destinies—a thought which
Herbart expresses so beautifully in the words—‘To the child, the
family should be the symbol of the order in the world; from the
parents one should derive by idealisation the characteristics of the
deity.’”
This idea of all education springing from and resting upon our
relation to Almighty God is one which we of the P.N.E.U. have ever
laboured to enforce. We take a very distinct stand upon this point.
We do not merely give a religious education, because that would
seem to imply the possibility of some other education, a secular
education, for example. But we hold that all education is divine, that
every good gift of knowledge and insight comes from above, that the
Lord the Holy Spirit is the supreme educator of mankind, and that the
culmination of all education (which may, at the same time, be
reached by a little child) is that personal knowledge of and intimacy
with the Supreme, in which our being finds its fullest perfection. We
hold, in fact, that noble conception of education held by the
mediæval church, as pictured upon the walls of the Spanish chapel
in Florence. Here we have represented the descent of the Holy
Ghost upon the Twelve, and directly under them, fully under the
illuminating rays, are the noble figures of the seven liberal arts,
Grammar, Rhetoric, Logic, Music, Astronomy, Geometry, Arithmetic,
and under these again the men who received and expressed, so far
as we know, the initial idea in each of these subjects; such men as
Pythagoras, Zoroaster, Euclid, whom we might call pagans, but
whom the earlier Church recognised as divinely taught and
illuminated.
Here follows a passage which we do more than endorse, for it
contains the very raison d’être of our society. “The education of the
children will always remain the holiest and highest of all family
duties. The welfare, civilisation, and culture of a people depend
essentially upon the degree of success that attends the education in
the homes. The family principle is the point at which both the
religious and educational life of a people centres, and about which it
revolves. It is a force in comparison with which every sovereign’s
command appears powerless.”
By the way, we are inclined to think that Dr. Rein’s mention of
Rousseau is a little misleading. It is true that in “Emil” the parents are
supplanted, but, notwithstanding that fact, perhaps no other
educationalist has done so much to awaken parents to their great
work as educators. After investigating the conditions of home
training, Dr. Rein proceeds to a discussion of schools (a) as they
exist in Germany—(b) as they exist in his own ideal, a discussion
which should be most interesting to parents.
Teleology, i.e., the theory of the purpose of education, falls next
under discussion in an extremely instructive chapter. It is well we
should know the vast uncertainty which exists on this fundamental
point. As a matter of fact, few of us know definitely what we propose
to ourselves in the education of our children. We do not know what it
is possible to effect, and, as a man does not usually compass more
than he aims at, the results of our education are very inadequate and
unsatisfactory.
“Shall the educator follow Rousseau and educate a man of nature
in the midst of civilised men? In so doing, as Herbart has shown, we
should simply repeat from the beginning the entire series of evils that
have already been surmounted. Or shall we turn to Locke and
prepare the pupil for the world which is customarily in league with
worldlings? We should then arrive at the standpoint of Basedow, and
aim to educate the pupil so that he would become a truly useful
member of human society. Of course we should always be harassed
with the secret doubt as to whether this is the ideal purpose after all,
and whether we are not at times directly enjoined to place the pupil
at variance with the usage and customary dealings of the world. If
we reflect that an endless career is open to man for his
improvement, we realise that only that education, whose aims are
always the highest, can hope to reach the lofty goals that mark this
career.
“Therefore an ideal aim must be present in the mind of the
educator. Possibly he can obtain information and help from
Pestalozzi, whose nature evinced such ideal tendencies. Pestalozzi
wished the welfare of mankind to be sought in the harmonious
cultivation of all powers. If one only knew what is to be understood
by a multiplicity of mental powers, and what is meant by the harmony
of various powers. These phrases sound very attractive, but give
little satisfaction. The purely formal aims of education will appeal just
as little to the educator: ‘Educate the pupil to independence;’ or,
‘educate the pupil to be his own educator;’ or, ‘educate the pupil so
that it will become better than its educator.’ (Hermann and Dorothea,
Hector and Astyanax in the Iliad). Such and similar attempts to fix
the purpose of education are abundant in the history of pedagogy;
but they do not bring us nearer the goal. In their formal character
they do not say, for example, of what kind the independence shall
be, what content it shall have, what aims it shall have in view, or in
what directions its course shall lie. For the pupil that has become
independent can use his freedom rightly for good just as well as
misuse it for evil.”
Herbart’s own theory of education, so far as we may venture to
formulate it, is strictly ethical as opposed to intellectual, that is, the
development and sustenance of the intellect is of secondary
importance to the educator for two reasons: character building is the
matter of first importance to human beings; and this because, (a)
train character and intellectual “development” largely takes care of
itself, and (b) the lessons designed for intellectual culture have high
ethical value, whether stimulating or disciplinary. This is familiar
ground to us: we too have taught, in season and out of season, that
the formation of character is the aim of the educator. So far, we are
at one with the philosopher; but, may we venture to say it, we have
arrived, through the study of Physiology, at the definiteness of aim
which he desires but does not reach. We must appeal, he says, to
Psychology, but then, he adds, “of course we cannot expect a
concordant answer from all psychologists; and in view of the
obscurity which still prevails in this sphere, the different views as to
the nature of the human soul and the extraordinary difficulty with
which the empirical method of investigation meets, an absolutely
indubitable explanation can hardly be expected.”
This is doubtless true of Psychology alone, but of Psychology
illuminated by Physiology we have another tale to tell. It is the study
of that border-land betwixt mind and matter, the brain, which yields
the richest results to the educator. For the brain is the seat of habit:
the culture of habit is, to a certain extent, physical culture: the
discipline of habit is at least a third part of the great whole which we
call education, and here we feel that the physical science of to-day
has placed us far in advance of the great philosopher of fifty years
ago. We hold with him entirely as to the importance of great
formative ideas in the education of children, but, we add to our ideas,
habits, and we labour to form habits upon a physical basis.
Character is the result not merely of the great ideas which are given
to us, but of the habits which we labour to form upon those ideas.
We recognise both principles and the result is a wide range of
possibilities in education, practical methods, and a definite aim. We
labour to produce a human being at his best physically, mentally,
morally, and spiritually, with the enthusiasms of religion, the good life,
of nature, of knowledge, of art and of manual work; and we do not
labour in the dark.
FOOTNOTES:
[16] Sonnenschein & Co., 3s.
CHAPTER XXII
THE TEACHING OF THE “PARENTS’ NATIONAL

EDUCATIONAL UNION”
Part I
One of Mr. Matthew Arnold’s discriminating utterances may help us

in the effort to define anew the scope and the methods of education.
In “A French Eton” (page 61) he says:—“The education of each class
in society has, or ought to have, its ideal, determined by the wants of
that class, and by its destination. Society may be imagined so
uniform that one education shall be suitable for all its members; we
have not a society of that kind, nor has any European country....
Looking at English society at this moment, one may say that the
ideal for the education of each of its classes to follow, the aim which
the education of each should particularly endeavour to reach, is
different.”
This remark helps us to define our position. We lay no claim to
original ideas or methods. We cannot choose but profit by the work
of the great educators. Such men as Locke and Rousseau,
Pestalozzi, and Froebel, have left us an inheritance of educational
thought which we must needs enter upon.
Our work is selective, but not merely so. We are progressive. We
take what former thinkers have left us, and go on from there.
For example, in this matter of class differentiation, we believe we
have scientific grounds for a line of our own. The Fathers (why
should we not have Fathers in education as well as in theology?)
worked out, for the most part, their educational thought with an
immediate view to the children of the poor. Because the children that
he had to deal with had a limited vocabulary, and untrained
observing powers, Pestalozzi taught them to see and then to say: “I
see a hole in the carpet. I see a small hole in the carpet. I see a
small round hole in the carpet. I see a small round hole with a black
edge in the carpet,” and so on; and it is very easy to see how good
such training would be for such children. But what is the case with
the children we have to deal with? We believe to-day on scientific
grounds in the doctrine of heredity, and certainly in this matter
experience supports our faith.
Punch has hit off the state of the case: “Come and see the puff-
puff, dear.” “Do you mean the locomotive, grandmamma?” As a
matter of fact, the child of four and five has a wider, more exact
vocabulary in everyday use, than that employed by his elders and
betters, and is constantly adding to this vocabulary with surprising
quickness; ergo, to give a child of this class a vocabulary is no part
of direct education. Again, we know that nothing escapes the keen
scrutiny of the little people. It is not their perceptive powers we have
to train, but the habit of methodical observation and accurate record.
Generations of physical toil do not tend to foster imagination. How
good, then, for the children of the working classes to have games
initiated for them, to be carried through little dramatic plays until,
perhaps, in the end they will be able to invent such little dramas for
themselves!
But the children of the cultured classes—why, surely their danger
is rather to live too much in realms of fancy. A single sentence in
lesson or talk, the slightest sketch of an historical character, and they
will play at it for a week, inventing endless incidents. Like Tennyson,
when he was a child, they will carry on the story of the siege and
defence of a castle (represented by a mound, with sticks for its
garrison) for weeks together, and a child engrossed with these larger
interests feels a sensible loss of dignity when he flaps his wings as a
pigeon or skips about as a lamb, though, no doubt, he will do these
things with pleasure for the teacher he loves. Imagination is
ravenous for food, not pining for culture, in the children of educated
parents, and education need not concern herself directly, for them,
with the development of the conceptive powers. Then with regard to
the cultivated child’s reasoning powers, most parents have had
experiences of this kind—Tommy is five. His mother had occasion to
talk to him about the Atlantic Cable, and said she did not know how it
was insulated; Tommy remarked next morning that he had been
thinking about it, and perhaps the water itself was an insulator. So far
from needing to develop their children’s reasoning powers, most
parents say—“Oh, wad the gods the giftie gie us”—to answer the
everlasting ‘why’ of the intelligent child.
In a word, to develop the child’s so-called faculties is the main
work of education when ignorant or otherwise deficient children are
concerned; but the children of educated people are never ignorant in
this sense. They awake to the world all agog for knowledge, and with
keen-edged faculties; therefore the principle of heredity causes us to
recast our idea of the office of education, and to recognise that the
child of intelligent parents is born with an inheritance of self-
developing faculties.
Thus education naturally divides itself into education for the
children of lettered, and education for the children of unlettered
parents. In fact, this class question, which we are all anxious to
evade in common life, comes practically into force in education. It is
absolutely necessary to individualise and say, this part of education
is the most important for this child, or this class, but may be
relegated into a lower place for another child or another class.
If science limits our range of work as regards the development of
so-called faculties, it extends it in equal measure with regard to
habit. Here we have no new doctrine to proclaim. “One custom
overcometh another,” said Thomas à Kempis, and that is all we have
to say; only physiologists have made clear to us the rationale of this
law of habit. We know that to form in his child right habits of thinking
and behaving is a parent’s chief duty, and that this can be done for
every child definitely and within given limits of time. But this question
has been already dealt with, and we need do no more than remind
parents of what they already know.
To nourish a child daily with loving, right, and noble ideas we
believe to be the parent’s next duty. The child having once received
the Idea will assimilate it in his own way, and work it into the fabric of
his life; and a single sentence from his mother’s lips may give him a
bent that will make him, or may tend to make him, painter or poet,
statesman or philanthropist. The object of lessons should be in the
main twofold: to train a child in certain mental habits, as attention,
accuracy, promptness, &c., and to nourish him with ideas which may
bear fruit in his life.
There are other educational principles which we bear in mind and
work out, but for the moment it is worth while for us to concentrate
our thought upon the fact that one of our objects is to accentuate the
importance of education under the two heads of the formation of
habits and the presentation of ideas, and as a corollary to recognise
that the development of faculties is not a supreme object with the
cultivated classes, because this is work which has been done for
their children in a former generation.
But how does all this work? Is it practical? Is it the question of to-
day? It must needs be practical because it gives the fullest
recognition to the two principles of human nature, the material, and
the spiritual. We are ready to concede all that the most advanced
biologist would ask of us. Does he say, “Thought is only a mode of
motion?” if so, we are not dismayed. We know that ninety-nine out of
a hundred thoughts that pass through our minds are involuntary, the
inevitable result of those modifications of the brain tissue which habit
has set up. The mean man thinks mean thoughts, the magnanimous
man great thoughts, because we all think as we are accustomed to
think, and Physiology shows us why. On the other hand, we
recognise that greater is the spirit within us than the matter which it
governs. Every habit has its beginning. The beginning is the idea
which comes with a stir and takes possession of us. The idea is the
motive power of life, and it is because we recognise the spiritual
potency of the idea that we are able to bow reverently before the fact
that God the Holy Spirit is Himself the Supreme Educator, dealing
with each of us severally in the things we call sacred and those we
call secular. We lay ourselves open to the spiritual impact of ideas
whether these be conveyed by the printed page, the human voice, or
whether they reach us without visible sign.
But ideas may be evil or may be good; and to choose between
the ideas that present themselves is, as we have been taught, the
one responsible work of a human being. It is the power of choice that
we would give our children. We ask ourselves “Is there any fruitful
idea underlying this or that study that the children are engaged in?”
We divest ourselves of the notion that to develop the faculties is the
chief thing, and a “subject” which does not rise out of some great
thought of life we usually reject as not nourishing, not fruitful; while
we usually, but not invariably, retain those studies which give
exercise in habits of clear and orderly thinking. We have some
gymnastics of the mind whose object is to exercise what we call
faculties as well as to train in the habit of clear and ordered thinking.
Mathematics, grammar, logic, &c., are not purely disciplinary; they do
develop, if a bull may be allowed us, intellectual muscle. We by no
means reject the familiar staples of education, in the school sense,
but we prize them even more for the record of intellectual habits they
leave in the brain tissue than for their distinct value in developing
certain “faculties.” Thus our first thought with regard to Nature-
knowledge is that the child should have a living personal
acquaintance with the things he sees. It concerns us more that he
should know bistort from persicaria, hawkweed from dandelion, and
where to find this and that, and how it looks, living and growing, than
that he should talk learnedly about epigynous and hypogynous. All
this is well in its place, but should come quite late, after the child has
seen and studied the living growing thing in situ, and has copied
colour and gesture as best he can.
So of object lessons, we are not anxious to develop his observing
powers on little bits of everything which he shall describe as opaque,
brittle, malleable, and so on. We would prefer not to take the edge
off his curiosity in this way; we should rather leave him receptive and
respectful for one of those opportunities for asking questions and
engaging in talk with his parents about the lock in the river, the
mowing machine, the ploughed field, which offer real seed to the
mind of a child, and never make him a priggish little person able to
tell all about it.
Once more, we know that there is a storehouse of thought
wherein we may find all the great ideas that have moved the world.
We are above all things anxious to give the child the key to this
storehouse.
The education of the day, it is said, does not produce reading
people. We are determined that the children shall love books,
therefore we do not interpose ourselves between the book and the
child. We read him his Tanglewood Tales, and when he is a little
older his Plutarch, not trying too much to break up or water down,
but leaving the child’s mind to deal with the matter as it can. We
endeavour that all our teaching and treatment of children shall be on
the lines of nature, their nature and ours, for we do not recognise
what is called “Child-nature.” We believe that children are human
beings at their best and sweetest but also at their weakest and least
wise. We are careful not to water down life for them but to present
such portions to them in such quantities as they can readily receive.
In a word we are very tenacious of the dignity and individuality of our
children. We recognise steady, regular growth with no transition
stage. This teaching is up to date, but it is as old as common sense.
Our claim is that our common sense rests on a basis of Physiology,
that we show a reason for all that we do, and that we recognise “the
science of the proportion of things,” put the first thing foremost, do
not take too much upon ourselves, but leave time and scope for the
workings of nature and of a higher Power than nature herself.
CHAPTER XXIII
THE TEACHING OF THE PARENTS’ NATIONAL

EDUCATIONAL UNION
Part II
As the philosophy which underlies any educational or social scheme
is really the vital part of that scheme, it may be well to set forth,
however meagrely, some fragments of P.N.E.U. Philosophy.
We believe—
That disposition, intellect, genius, come pretty much by nature.
That character is an achievement, the one practical achievement
possible to us for ourselves and for our children.
That all real advance, in family or individual, or nation, is along the
lines of character.
That, therefore, to direct and assist the evolution of character is
the chief office of education.
But perhaps we shall clear the ground better by throwing a little of
the teaching of the Union into categorical form:—
What is character?
The resultant or residuum of conduct.
That is to say, a man is what he has made himself by the thoughts
in which he has allowed himself, the words he has spoken, the
deeds he has done.
How does conduct itself originate?
Commonly, in our habitual modes of thought. We think as we are
accustomed to think, and, therefore, act as we are accustomed to
act.
What, again, is the origin of these habits of thought and act?
Commonly, inherited disposition. The man who is generous,
obstinate, hot-tempered, devout, is so, on the whole, because that
strain of character runs in his family.
Are there any means of modifying inherited dispositions?
Yes; marriage, for the race; education, for the individual.
How may a bad habit which has its rise in an inherited disposition
be corrected?
By the contrary good habit: as Thomas à Kempis has said, “One
custom overcometh another.”
Trace the genesis of a habit.
Every act proceeds from a thought. Every thought modifies
somewhat the material structure of the brain. That is, the nerve
substance of the brain forms itself to the manner of thoughts we
think. The habit of act arises from the habit of thought. The person
who thinks, “Oh, it will do;” “Oh, it doesn’t matter,” forms a habit of
negligent and imperfect work.
How may such habit be corrected?
By introducing the contrary line of thought, which will lead to
contrary action. “This must be done well, because——”
Is it enough to think such thought once?
No; the stimulus of the new idea must be applied until it is, so to
speak, at home in the brain, and arises involuntarily.
What do you mean by involuntary thought?
The brain is at work unceasingly, is always thinking, or rather is
always being acted upon by thought, as the keys of an instrument by
the fingers of a player.
Is the person aware of all the thoughts that the brain elaborates?
No; only of those which are new and “striking.” The old familiar
“way of thinking” beats in the brain without the consciousness of the
thinker.
What name is given to this unconscious thought?
Unconscious (or involuntary) cerebration.
Why is it important to the educator?
Because most of our actions spring from thoughts of which we are
not conscious, or, anyway, which are involuntary.
Is there any means of altering the trend of unconscious
cerebration?
Yes; by diverting it into a new channel.
The “unconscious cerebration” of the greedy child runs upon
cakes and sweetmeats: how may this be corrected?
By introducing a new idea—the pleasure of giving pleasure with
these good things, for example.
Is the greedy child capable of receiving such new idea?
Most certainly; because benevolence, the desire of benefiting
others, is one of those springs of action in every human being that
need only to be touched to make them act.
Give an example of this fact.
Mungo Park, dying of thirst, hunger, and weariness in an African
desert, found himself in the vicinity of a cannibal tribe. He gave
himself up for lost, but a woman of the tribe found him, took
compassion on him, brought him milk, hid him, and nourished him
until he was restored and could take care of himself.
Are there any other springs of action which may be touched with
effect in every human being?
Yes, such as the desire of knowledge, of society, of distinction, of
wealth; friendship, gratitude, and many more. Indeed, it is not
possible to incite a human being to any sort of good and noble
conduct but you touch a responsive spring.
How, then, can human beings do amiss?
Because the good feelings have their opposite bad feelings,
springs which also await a touch. Malevolence is opposed to
benevolence. It is easy to imagine that the unstable savage woman
might have been amongst the first to devour the man she cherished,
had one of her tribe given an impulse to the springs of hatred within
her.
In view of these internal impulses, what is the duty of the
educator?
To make himself acquainted with the springs of action in a human
being, and to touch them with such wisdom, tenderness and
moderation that the child is insensibly led into the habits of the good
life.
Name some of these habits.
Diligence, reverence, gentleness, truthfulness, promptness,
neatness, courtesy; in fact, the virtues and graces which belong to
persons who have been “well brought up.”
Is it enough to stimulate a spring of action—say, curiosity, or the
desire of knowledge, once in order to secure a habit?
No; the stimulus must be repeated, and action upon it secured
over and over many times before a habit is formed.
What common error do people make about the formation of
habits?
They allow lapses; they train a child to “shut the door after him”
twenty times, and allow him to leave it open the twenty-first.
With what result?
That the work has to be done over again, because the growth of
brain tissue to the new habit (the forming of cell-connections) has
been disturbed. The result would appear to be much the same as
when the flesh-forming process which knits up a wound is disturbed.

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International Connection: International Manual Accounting Systems 231

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Integrity, Objectivity, and Ethics in Business: Tips on Comparing Direct Write-Off

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Managerial Accounting Internal users of accounting information include man-

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Role of Ethics in Accounting and Business

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THE TEACHING OF THE “PARENTS’ NATIONAL

One of Mr. Matthew Arnold’s discriminating utterances may help us

THE TEACHING OF THE PARENTS’ NATIONAL

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