1
ACCOUNTING
Contents
Chapter 1: Accounting in Action......................................................................3
Accounting Activities and Users....................................................................3
Who uses Accounting Data?.........................................................................4
The Building Block of Accounting..................................................................5
Accounting Principles....................................................................................5
The Accounting Equation..............................................................................7
The EXPANDED Accounting Equation...........................................................8
Analyzing Business Transactions..................................................................9
Summary of Transactions...........................................................................10
Measurement Principles..............................................................................10
Assumptions in the accounting process......................................................10
Forms of Business Ownership.....................................................................11
Financial Reporting.....................................................................................11
(Consolidated) Financial Statements..........................................................11
The Four Financial Statements...................................................................12
Chapter 2: The Recording Process.................................................................13
Accounts, Debits, and Credits.....................................................................14
Debit vs. Credit...........................................................................................14
Debits and Credits......................................................................................15
Summary of Debit / Credit Convention / Rules...........................................16
The Accounting Process..............................................................................17
The Accounting Cycle.................................................................................18
The Journal..................................................................................................18
The Ledger and Posting..............................................................................18
Chart of Accounts.......................................................................................20
The Recording Process: Illustrated.............................................................20
Trial Balance...............................................................................................20
1
, 2
Limitations of a Trial Balance......................................................................21
Trial Balance...............................................................................................21
A Look at U.S. GAAP....................................................................................23
EXERCISES:....................................................................................................23
Chapter 3: Adjusting the accounts.................................................................31
Accrual-Basis and Adjusting Entries............................................................32
Fiscal and Calendar Years...........................................................................32
Accrual – versus Cash-Basis Accounting.....................................................32
Recognizing Revenues and Expenses.........................................................33
The Need for Adjusting Entries...................................................................34
Types of Adjusting Entries..........................................................................34
Adjusting Entries for Deferrals:...................................................................35
Prepaid Expenses.......................................................................................35
Depreciation...............................................................................................39
Unearned Revenues....................................................................................41
Adjusting Entries for Accruals.....................................................................42
Accrued Revenues......................................................................................42
Accrued Expenses.......................................................................................44
Summary of Basic Relationships.................................................................46
Adjusted Trial Balance................................................................................46
Preparing Financial Statements..................................................................48
Appendix: Alternative Treatment of Deferrals............................................49
A Look at U.S. GAAP....................................................................................49
Qualities of Useful Information...................................................................49
Assumptions in Financial Reporting............................................................50
Principles of Financial Reporting.................................................................50
Cost Constraint...........................................................................................50
Chapter 4: Completing the accounting cycle.................................................51
The worksheet............................................................................................51
Preparing Financial Statements from a Worksheet.....................................52
2
, 3
Closing the Books.......................................................................................52
Preparing Closing Entries............................................................................53
Summary: The Accounting Cycle................................................................54
Correcting Entries.......................................................................................54
Correcting Entries – An Avoidable Step......................................................55
Classified Statement of Financial Position..................................................56
Intangible Assets.....................................................................................57
Property, Plant and Equipment................................................................57
Long-Term Investments...........................................................................57
Current Assets.........................................................................................57
Owner’s Equity........................................................................................58
Non-Current Liabilities.............................................................................58
Current Liabilities....................................................................................58
Appendix 4a Reversing Entries...................................................................61
A Look at U.S. GAAP....................................................................................62
Chapter 18: Financial Analysis.......................................................................62
Introduction to Financial Statement Analysis.............................................62
Horizontal Analysis.....................................................................................63
Income Statement: from Sales to Net Income............................................63
Vertical Analysis.........................................................................................64
Ratio Analysis.............................................................................................65
Profitability Ratios.......................................................................................68
Solvency Ratios..........................................................................................72
Chapter 1: Accounting in Action
Accounting Activities and Users
Accounting consists of 3 activities:
1) Identification – select economic events (transactions)
Company Economic Event
3
, 4
Tesla Inc. - Purchase of raw materials for
electric vehicle production
Amazon - Payment of employee wages for
logistics and warehouse workers
Starbucks - Opening a new store
These economic events directly affect each company’s financial
statements, including the balance sheet, income statement, and cash flow
statement.
2) Recording – record, classify, and summarize = bookkeeping
Recording : keeping a systematic chronological diary of events =
bookkeeping
3) Communication: prepare accounting reports & analyze and interpret
for users
After economic events are identified and recorded, financial
information is communicated.
- Prepare accounting reports
o Financial statements
o Report recorded date in standardized way
- Analyze and interpret for users
o Analyze: use ratios, percentages to highlight financial trends and
relationships
o Interpretation: explaining uses, meaning and limitations of
reported data
Who uses Accounting Data?
Internal users:
- Finance – is cash sufficient to pay dividends to Lotus Bakeries
shareholders?
- Marketing – What price should Samsung charge for a cell phone to
maximize the company’s net income?
- Human Resources – can Audi afford to give its employees pay raises
this year?
- Management – which Coca-Cola product line is the most profitable?
Should any product lines be eliminated?
External users:
- Investors:
4
ACCOUNTING
Contents
Chapter 1: Accounting in Action......................................................................3
Accounting Activities and Users....................................................................3
Who uses Accounting Data?.........................................................................4
The Building Block of Accounting..................................................................5
Accounting Principles....................................................................................5
The Accounting Equation..............................................................................7
The EXPANDED Accounting Equation...........................................................8
Analyzing Business Transactions..................................................................9
Summary of Transactions...........................................................................10
Measurement Principles..............................................................................10
Assumptions in the accounting process......................................................10
Forms of Business Ownership.....................................................................11
Financial Reporting.....................................................................................11
(Consolidated) Financial Statements..........................................................11
The Four Financial Statements...................................................................12
Chapter 2: The Recording Process.................................................................13
Accounts, Debits, and Credits.....................................................................14
Debit vs. Credit...........................................................................................14
Debits and Credits......................................................................................15
Summary of Debit / Credit Convention / Rules...........................................16
The Accounting Process..............................................................................17
The Accounting Cycle.................................................................................18
The Journal..................................................................................................18
The Ledger and Posting..............................................................................18
Chart of Accounts.......................................................................................20
The Recording Process: Illustrated.............................................................20
Trial Balance...............................................................................................20
1
, 2
Limitations of a Trial Balance......................................................................21
Trial Balance...............................................................................................21
A Look at U.S. GAAP....................................................................................23
EXERCISES:....................................................................................................23
Chapter 3: Adjusting the accounts.................................................................31
Accrual-Basis and Adjusting Entries............................................................32
Fiscal and Calendar Years...........................................................................32
Accrual – versus Cash-Basis Accounting.....................................................32
Recognizing Revenues and Expenses.........................................................33
The Need for Adjusting Entries...................................................................34
Types of Adjusting Entries..........................................................................34
Adjusting Entries for Deferrals:...................................................................35
Prepaid Expenses.......................................................................................35
Depreciation...............................................................................................39
Unearned Revenues....................................................................................41
Adjusting Entries for Accruals.....................................................................42
Accrued Revenues......................................................................................42
Accrued Expenses.......................................................................................44
Summary of Basic Relationships.................................................................46
Adjusted Trial Balance................................................................................46
Preparing Financial Statements..................................................................48
Appendix: Alternative Treatment of Deferrals............................................49
A Look at U.S. GAAP....................................................................................49
Qualities of Useful Information...................................................................49
Assumptions in Financial Reporting............................................................50
Principles of Financial Reporting.................................................................50
Cost Constraint...........................................................................................50
Chapter 4: Completing the accounting cycle.................................................51
The worksheet............................................................................................51
Preparing Financial Statements from a Worksheet.....................................52
2
, 3
Closing the Books.......................................................................................52
Preparing Closing Entries............................................................................53
Summary: The Accounting Cycle................................................................54
Correcting Entries.......................................................................................54
Correcting Entries – An Avoidable Step......................................................55
Classified Statement of Financial Position..................................................56
Intangible Assets.....................................................................................57
Property, Plant and Equipment................................................................57
Long-Term Investments...........................................................................57
Current Assets.........................................................................................57
Owner’s Equity........................................................................................58
Non-Current Liabilities.............................................................................58
Current Liabilities....................................................................................58
Appendix 4a Reversing Entries...................................................................61
A Look at U.S. GAAP....................................................................................62
Chapter 18: Financial Analysis.......................................................................62
Introduction to Financial Statement Analysis.............................................62
Horizontal Analysis.....................................................................................63
Income Statement: from Sales to Net Income............................................63
Vertical Analysis.........................................................................................64
Ratio Analysis.............................................................................................65
Profitability Ratios.......................................................................................68
Solvency Ratios..........................................................................................72
Chapter 1: Accounting in Action
Accounting Activities and Users
Accounting consists of 3 activities:
1) Identification – select economic events (transactions)
Company Economic Event
3
, 4
Tesla Inc. - Purchase of raw materials for
electric vehicle production
Amazon - Payment of employee wages for
logistics and warehouse workers
Starbucks - Opening a new store
These economic events directly affect each company’s financial
statements, including the balance sheet, income statement, and cash flow
statement.
2) Recording – record, classify, and summarize = bookkeeping
Recording : keeping a systematic chronological diary of events =
bookkeeping
3) Communication: prepare accounting reports & analyze and interpret
for users
After economic events are identified and recorded, financial
information is communicated.
- Prepare accounting reports
o Financial statements
o Report recorded date in standardized way
- Analyze and interpret for users
o Analyze: use ratios, percentages to highlight financial trends and
relationships
o Interpretation: explaining uses, meaning and limitations of
reported data
Who uses Accounting Data?
Internal users:
- Finance – is cash sufficient to pay dividends to Lotus Bakeries
shareholders?
- Marketing – What price should Samsung charge for a cell phone to
maximize the company’s net income?
- Human Resources – can Audi afford to give its employees pay raises
this year?
- Management – which Coca-Cola product line is the most profitable?
Should any product lines be eliminated?
External users:
- Investors:
4
