Summary Accounting (Year 2)
Video lecture 1 (12-04-23)
Chapter 1: Accounting and the business environment
Why is accounting important?
- Accounting is the information system that measures business activities,
processes the information into reports, and communicates the results to the
decision makers.
Two types of accounting:
1. Financial accounting
- External decision makers
- Should I invest in the business?
- Is the business profitable?
2. Managerial accounting
- Internal decision makers
- How much money should the business budget for production?
- Should the business expand to new locations?
Organizations that govern accounting:
For the USA:
FASB > Financial Accounting Standards Board
- Privately funded
- Creates the rules and standards that govern financial accounting
In Europe: International Accounting Standards Board (IASB)
SEC > Securities and Exchange Commission
- Oversees the US financial markets
In Europe: European Securities and Market Authority (ESMA)
Generally accepted accounting principles (GAAP):
- Guidelines that govern accounting
- Based on conceptual framework
- Relevant: the information allows users to make a decision
- Faithfully representative: the info is complete, neutral and free from error
Accounting assumptions:
- Economic entity assumption
- Monetary unit assumption
- Cost principle
- Going concern assumption
The accounting equation:
- Assets = liabilities + equity
The accounting equation MUST always be in balance!
- Assets: economic resources that are expected to benefit the firm in the future
(land, cash, inventory, furniture)
- Liabilities: debts that are owed to creditors (notes payable, accounts payable,
salaries payable)
- Equity: owner’s capital invested in the organization (owner’s capital, owner’s
withdrawals)
, Equity= owner’s capital - owner’s withdrawals + revenues – expenses
Transactions:
- A transaction is a very special kind of historical event > 2 premises
1. It involves the exchange of economic resources
2. We must be able to measure the economic impact in monetary units
See video lecture 1
Financial statements > 4 kinds:
1. Income statement
2. Statement of owner’s equity
3. Balance sheet
4. Statement of cash flows
These are 4 basic financial statements used by all firms as the primary means of
communicating to stakeholders
Income statement: reports the success or failure of the company’s operations
for a period of time. How well is a company doing in a certain period.
- Revenues – expenses = net income (profit)
Statement of owner’s equity: shows amounts and causes of changes in
owner’s capital during a certain period
- Owner contribution + net income – owner withdrawal
Balance sheet: reports assets and claim to those assets at a specific point in
time
- Assets = liabilities + owner’s equity
Statement of cash flows: answers the question of whether the business
generates enough cash to pay its bills, where is the cash going?
- Cash flow from operating activities + cash flow from investing activities + cash
flow from financing activities
Return on assets (ROA):
- Important ratio, tells us how well the company did
ROA= Net income / Average total assets
Video lecture 2 (12-04-23)
Chapter 2: Recording Business Transactions
What is an account?
- Assets = liabilities + equity accounting equation
- Each element of the accounting equation contains smaller elements called
accounts
- Account: the detailed record of all increases and decreases that have
occurred in an individual asset, liability, equity, revenue or expense during a
specific period
Double entry accounting:
- Transactions always have 2 impacts on the accounting equation
- These are double entries and keep the accounting equation in balance
,T-account:
- A T-account is a shorted visual form of the more
formal general ledger account format
- Increases are shown on one side of the T-account and
decreases on the other side
- The T-account is balanced at the end of each period
- Debit = left side, Credit = right side
Debits and credits:
- An account with more debits than credits will have a debit balance
- An account with more credits than debits will have a credit balance
- Some accounts will be increased with debits, and some accounts will be
increased with credits
The balancing impact of transactions can be explained using T-accounts and debits
and credits
- When revenues exceed expenses, net income increases owner’s capital
How to record transactions?
- Transaction occurs source documents are prepared transactions are
analysed transactions are journalized and posted
1. Transactions are first recorded using a journal entry account to be debited
is usually written first
2. Next, each amount should be posted to the appropriate T-account
Trial balance:
- The primary purpose of the trial balance is to prove the mathematical equality
of debits and credits after posting
- The amounts come from the individual account balances in the general ledger
- Information for statement of owner’s equity comes from the trial balance AND
from the income statement
Debt ratio:
- Debt ratio shows the proportion of assets financed with debt
- It can be used to evaluate a business’s ability to pay its debts and to
determine if the company has too much debt to be considered financially
‘’healthy’’
Debt ratio = total liabilities / total assets
, Video lecture 3 (13-04-23)
Chapter 3: The Adjusting Process
Difference between cash-based accounting and accrual-based accounting?
Cash based:
- Revenue is recorded when cash is received
- Expenses are recorded when cash is paid
- Not allowed under GAAP
Accrual based:
- Revenue is recorded when it is earned
- Expenses are recorded when incurred
- Generally used by larger businesses
The time period concept:
- Assumes that a business’s activities can be sliced into small segments and
that financial statements can be prepared for specific time periods, such as a
month, quarter, or year
- Any twelve-month period is referred to as a fiscal year
The revenue recognition principle:
- Revenue should be recorded when it is earned
- A good has been delivered or a service has been performed
- The earnings process is complete
The amount of revenues must represent the actual selling price
The matching principle:
- Expenses are matched at the end of the period against the revenues for that
period
- Expenses are recorded when they are incurred during the period
Adjusting entry rules:
- Never involve cash
- Either increase revenue or increase an expense
- Accrued means amount must be recorded
Adjusted journal entries:
- Adjustments to the trial balance are made by recording actual adjusting journal
entries
Adjusting journal entries can be divided into two basic categories:
1. Prepaids: prepaid expenses, unearned revenues
2. Accruals: accrued revenues, accrued expenses
Depreciation:
- Long-lived, tangible assets used to generate revenue are referred to as plant
assets
- Plant assets act like prepaid expenses
- Paid for when acquired, used up over time, used to produce revenues
Depreciation: the process of systematically recording the periodic usage of a plant
asset to generate revenues
- The account used are: depreciation expense, accumulated depreciation
(contra-asset)
- LAND IS NEVER DEPRECIATED
Video lecture 1 (12-04-23)
Chapter 1: Accounting and the business environment
Why is accounting important?
- Accounting is the information system that measures business activities,
processes the information into reports, and communicates the results to the
decision makers.
Two types of accounting:
1. Financial accounting
- External decision makers
- Should I invest in the business?
- Is the business profitable?
2. Managerial accounting
- Internal decision makers
- How much money should the business budget for production?
- Should the business expand to new locations?
Organizations that govern accounting:
For the USA:
FASB > Financial Accounting Standards Board
- Privately funded
- Creates the rules and standards that govern financial accounting
In Europe: International Accounting Standards Board (IASB)
SEC > Securities and Exchange Commission
- Oversees the US financial markets
In Europe: European Securities and Market Authority (ESMA)
Generally accepted accounting principles (GAAP):
- Guidelines that govern accounting
- Based on conceptual framework
- Relevant: the information allows users to make a decision
- Faithfully representative: the info is complete, neutral and free from error
Accounting assumptions:
- Economic entity assumption
- Monetary unit assumption
- Cost principle
- Going concern assumption
The accounting equation:
- Assets = liabilities + equity
The accounting equation MUST always be in balance!
- Assets: economic resources that are expected to benefit the firm in the future
(land, cash, inventory, furniture)
- Liabilities: debts that are owed to creditors (notes payable, accounts payable,
salaries payable)
- Equity: owner’s capital invested in the organization (owner’s capital, owner’s
withdrawals)
, Equity= owner’s capital - owner’s withdrawals + revenues – expenses
Transactions:
- A transaction is a very special kind of historical event > 2 premises
1. It involves the exchange of economic resources
2. We must be able to measure the economic impact in monetary units
See video lecture 1
Financial statements > 4 kinds:
1. Income statement
2. Statement of owner’s equity
3. Balance sheet
4. Statement of cash flows
These are 4 basic financial statements used by all firms as the primary means of
communicating to stakeholders
Income statement: reports the success or failure of the company’s operations
for a period of time. How well is a company doing in a certain period.
- Revenues – expenses = net income (profit)
Statement of owner’s equity: shows amounts and causes of changes in
owner’s capital during a certain period
- Owner contribution + net income – owner withdrawal
Balance sheet: reports assets and claim to those assets at a specific point in
time
- Assets = liabilities + owner’s equity
Statement of cash flows: answers the question of whether the business
generates enough cash to pay its bills, where is the cash going?
- Cash flow from operating activities + cash flow from investing activities + cash
flow from financing activities
Return on assets (ROA):
- Important ratio, tells us how well the company did
ROA= Net income / Average total assets
Video lecture 2 (12-04-23)
Chapter 2: Recording Business Transactions
What is an account?
- Assets = liabilities + equity accounting equation
- Each element of the accounting equation contains smaller elements called
accounts
- Account: the detailed record of all increases and decreases that have
occurred in an individual asset, liability, equity, revenue or expense during a
specific period
Double entry accounting:
- Transactions always have 2 impacts on the accounting equation
- These are double entries and keep the accounting equation in balance
,T-account:
- A T-account is a shorted visual form of the more
formal general ledger account format
- Increases are shown on one side of the T-account and
decreases on the other side
- The T-account is balanced at the end of each period
- Debit = left side, Credit = right side
Debits and credits:
- An account with more debits than credits will have a debit balance
- An account with more credits than debits will have a credit balance
- Some accounts will be increased with debits, and some accounts will be
increased with credits
The balancing impact of transactions can be explained using T-accounts and debits
and credits
- When revenues exceed expenses, net income increases owner’s capital
How to record transactions?
- Transaction occurs source documents are prepared transactions are
analysed transactions are journalized and posted
1. Transactions are first recorded using a journal entry account to be debited
is usually written first
2. Next, each amount should be posted to the appropriate T-account
Trial balance:
- The primary purpose of the trial balance is to prove the mathematical equality
of debits and credits after posting
- The amounts come from the individual account balances in the general ledger
- Information for statement of owner’s equity comes from the trial balance AND
from the income statement
Debt ratio:
- Debt ratio shows the proportion of assets financed with debt
- It can be used to evaluate a business’s ability to pay its debts and to
determine if the company has too much debt to be considered financially
‘’healthy’’
Debt ratio = total liabilities / total assets
, Video lecture 3 (13-04-23)
Chapter 3: The Adjusting Process
Difference between cash-based accounting and accrual-based accounting?
Cash based:
- Revenue is recorded when cash is received
- Expenses are recorded when cash is paid
- Not allowed under GAAP
Accrual based:
- Revenue is recorded when it is earned
- Expenses are recorded when incurred
- Generally used by larger businesses
The time period concept:
- Assumes that a business’s activities can be sliced into small segments and
that financial statements can be prepared for specific time periods, such as a
month, quarter, or year
- Any twelve-month period is referred to as a fiscal year
The revenue recognition principle:
- Revenue should be recorded when it is earned
- A good has been delivered or a service has been performed
- The earnings process is complete
The amount of revenues must represent the actual selling price
The matching principle:
- Expenses are matched at the end of the period against the revenues for that
period
- Expenses are recorded when they are incurred during the period
Adjusting entry rules:
- Never involve cash
- Either increase revenue or increase an expense
- Accrued means amount must be recorded
Adjusted journal entries:
- Adjustments to the trial balance are made by recording actual adjusting journal
entries
Adjusting journal entries can be divided into two basic categories:
1. Prepaids: prepaid expenses, unearned revenues
2. Accruals: accrued revenues, accrued expenses
Depreciation:
- Long-lived, tangible assets used to generate revenue are referred to as plant
assets
- Plant assets act like prepaid expenses
- Paid for when acquired, used up over time, used to produce revenues
Depreciation: the process of systematically recording the periodic usage of a plant
asset to generate revenues
- The account used are: depreciation expense, accumulated depreciation
(contra-asset)
- LAND IS NEVER DEPRECIATED
