Table of Contents
CHAPTER 1: ACCOUNTING IN ACTION ......................................................................................................... 4
ACCOUNTING ACTIVITIES AND USERS ............................................................................................................................4
IDENTIFICATION ..............................................................................................................................................4
Recording ........................................................................................................................................................4
Communication...............................................................................................................................................4
Who uses accounting data?............................................................................................................................4
THE BUILDING BLOCKS OF ACCOUNTING .......................................................................................................................5
Ethics in financial reporting ............................................................................................................................5
Accounting Standards .....................................................................................................................................5
Measurement Principles .................................................................................................................................5
Assumptions....................................................................................................................................................6
THE ACCOUNTING EQUATION .....................................................................................................................................6
ASSETS.............................................................................................................................................................6
LIABILITIES.......................................................................................................................................................6
OWNER’S EQUITY............................................................................................................................................7
Accounting Transactions .................................................................................................................................7
Transaction Analysis .......................................................................................................................................8
THE FOUR FINANCIAL STATEMENTS ..............................................................................................................................9
Income Statement...........................................................................................................................................9
Owner’s Equity Statement ..............................................................................................................................9
Statement of Financial Position ......................................................................................................................9
Statement of Cash Flows ..............................................................................................................................10
CHAPTER 2: THE RECORDING PROCESS ...................................................................................................... 11
ACCOUNTS, DEBITS, AND CREDITS .............................................................................................................................11
The Account ..................................................................................................................................................11
Debits and Credits .........................................................................................................................................11
Summary of Debit/Credit Rules ....................................................................................................................13
THE JOURNAL ........................................................................................................................................................13
The Recording Process ..................................................................................................................................13
The journal ....................................................................................................................................................13
THE LEDGER AND POSTING........................................................................................................................................14
The ledger .....................................................................................................................................................14
Posting ..........................................................................................................................................................14
Chart of accounts ..........................................................................................................................................15
The recording process illustrated..................................................................................................................15
Summary illustration of journalizing and posting ........................................................................................16
THE TRIAL BALANCE ................................................................................................................................................17
Limitations of a trial balance ........................................................................................................................17
Locating errors ..............................................................................................................................................17
Currency signs and underlining ....................................................................................................................17
A LOOK AT US GAAP .............................................................................................................................................18
Similarities: ...................................................................................................................................................18
Differences: ...................................................................................................................................................18
CHAPTER 3: ADJUSTING THE ACCOUNTS ................................................................................................... 25
1
, ACCRUAL-BASIS ACCOUNTING AND ADJUSTING ENTRIES ................................................................................................25
Fiscal and calendar years..............................................................................................................................25
Accrual -versus cash-basis accounting..........................................................................................................25
Recognizing revenues and expenses .............................................................................................................25
The need for adjusting entries ......................................................................................................................26
Types of adjusting entries .............................................................................................................................26
ADJUSTING ENTRIES FOR DEFERRALS ..........................................................................................................................26
Prepaid expenses ..........................................................................................................................................26
Unearned revenues .......................................................................................................................................27
ADJUSTING ENTRIES FOR ACCRUALS ...........................................................................................................................28
Accrued revenues ..........................................................................................................................................28
Accrued expenses..........................................................................................................................................28
Summary of basic relationships ....................................................................................................................29
ADJUSTED TRIAL BALANCE AND FINANCIAL STATEMENT .................................................................................................29
Preparing the Adjusted trial balance ............................................................................................................29
Preparing financial statements.....................................................................................................................29
ALTERNATIVE TREATMENT OF DEFERRALS ....................................................................................................................29
Prepaid expenses ..........................................................................................................................................29
Unearned revenues .......................................................................................................................................29
Summary of Additional adjustment relationships ........................................................................................29
A LOOK AT US GAAP .............................................................................................................................................30
Key points......................................................................................................................................................30
FINANCIAL REPORTING CONCEPTS .............................................................................................................................30
Qualities of useful information .....................................................................................................................30
Assumptions in financial reporting ...............................................................................................................31
Principles in financial reporting ....................................................................................................................31
Cost contraint................................................................................................................................................31
CHAPTER 4: COMPLETING THE ACCOUNTING CYCLE (CLOSING THE ACCOUNTS) .......................................... 32
THE WORKSHEET....................................................................................................................................................32
Steps in preparing a worksheet ....................................................................................................................32
Preparing financial statements from a worksheet .......................................................................................34
Preparing adjusting entries from a worksheet .............................................................................................35
CLOSING THE BOOKS ...............................................................................................................................................35
Preparing closing entries ..............................................................................................................................35
Posting closing entries ..................................................................................................................................37
Preparing a post-closing trial balance ..........................................................................................................38
THE ACCOUNTING CYCLE AND CORRECTING ENTRIES .....................................................................................................39
Summary of the accounting cycle .................................................................................................................39
Reversing entries – an optional step.............................................................................................................43
Correcting entries – an avoidable step .........................................................................................................43
CLASSIFIED STATEMENT OF FINANCIAL POSITION ..........................................................................................................43
Intangible assets ...........................................................................................................................................43
Property, plant and equipment .....................................................................................................................44
Long-term investments .................................................................................................................................44
Current assets ...............................................................................................................................................45
Owner’s equity ..............................................................................................................................................45
Non-current liabilities ...................................................................................................................................45
Current liabilities ...........................................................................................................................................46
2
, Financial statements .....................................................................................................................................46
REVERSING ENTRIES ................................................................................................................................................46
Reversing entries example ............................................................................................................................47
CHAPTER 18: FINANCIAL ANALYSIS, THE BIG PICTURE ................................................................................ 48
BASICS OF FINANCIAL STATEMENT ANALYSIS ................................................................................................................48
Need for comparative analysis .....................................................................................................................48
Tools of analysis ............................................................................................................................................48
Characteristics ..............................................................................................................................................48
Horizontal analysis........................................................................................................................................48
Vertical analysis ............................................................................................................................................50
RATIO ANALYSIS .....................................................................................................................................................51
Liquidity Ratios .............................................................................................................................................52
PROFITABILITY RATIOS ..................................................................................................................................53
SOLVENCY RATIOS .........................................................................................................................................55
Summary of ratios ........................................................................................................................................56
3
, CHAPTER 1: ACCOUNTING IN ACTION
Accounting activities and users
Accounting consists of three activities
1. IDENTIFICATION - select economic events (TRANSACTIONS)
2. RECORDING - Record, classify, and summarize = BOOKKEEPING
3. COMMUNICATION - Prepare accounting reports & Analyse and interpret for users
IDENTIFICATION
Economic events: Events that have a financial impact on a company or organization and can be
measured in monetary terms. They directly affect each company’s financial statements, including the
balance sheet, income statement, and cash flow statement.
ex. the launch of the new iPhone is not an economic event, but it has economic consequences. The sale
of an iPhone IS an economic event.
RECORDING
- Record, classify, and summarize
- Keeping a systematic, chronological diary of events
- The accounting process includes the bookkeeping function. Bookkeeping usually involves
only the recording of economic events. It is just 1 part of the accounting process.
COMMUNICATION
- After economic events are identified and recorded, financial information is communicated
- When you communicate about your numbers and it exceeds expectations, it can gain a lot of
money and possibilities
- A vital element in communicating economic events is the accountant’s ability to analyze and
interpret the reported information. Analysis involves use of ratios, percentages, graphs, and
charts to highlight significant financial trends and relationships. Interpretation involves
explaining the 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 (owners) use accounting information to decide whether to buy, hold, or sell ownership
shares of a company - Is Microsoft earning satisfactory income? How does Netflix compare in size
and profitability with Disney Plus?
- Creditors (suppliers, bankers) use AD to evaluate the risks of granting credit or lending money -
Will Thai Airlines be able to pay its debts as they come due?
= individuals, organizations, or financial institutions that lend money or extend credit to a
company or individual with the expectation of repayment in the future.
4
CHAPTER 1: ACCOUNTING IN ACTION ......................................................................................................... 4
ACCOUNTING ACTIVITIES AND USERS ............................................................................................................................4
IDENTIFICATION ..............................................................................................................................................4
Recording ........................................................................................................................................................4
Communication...............................................................................................................................................4
Who uses accounting data?............................................................................................................................4
THE BUILDING BLOCKS OF ACCOUNTING .......................................................................................................................5
Ethics in financial reporting ............................................................................................................................5
Accounting Standards .....................................................................................................................................5
Measurement Principles .................................................................................................................................5
Assumptions....................................................................................................................................................6
THE ACCOUNTING EQUATION .....................................................................................................................................6
ASSETS.............................................................................................................................................................6
LIABILITIES.......................................................................................................................................................6
OWNER’S EQUITY............................................................................................................................................7
Accounting Transactions .................................................................................................................................7
Transaction Analysis .......................................................................................................................................8
THE FOUR FINANCIAL STATEMENTS ..............................................................................................................................9
Income Statement...........................................................................................................................................9
Owner’s Equity Statement ..............................................................................................................................9
Statement of Financial Position ......................................................................................................................9
Statement of Cash Flows ..............................................................................................................................10
CHAPTER 2: THE RECORDING PROCESS ...................................................................................................... 11
ACCOUNTS, DEBITS, AND CREDITS .............................................................................................................................11
The Account ..................................................................................................................................................11
Debits and Credits .........................................................................................................................................11
Summary of Debit/Credit Rules ....................................................................................................................13
THE JOURNAL ........................................................................................................................................................13
The Recording Process ..................................................................................................................................13
The journal ....................................................................................................................................................13
THE LEDGER AND POSTING........................................................................................................................................14
The ledger .....................................................................................................................................................14
Posting ..........................................................................................................................................................14
Chart of accounts ..........................................................................................................................................15
The recording process illustrated..................................................................................................................15
Summary illustration of journalizing and posting ........................................................................................16
THE TRIAL BALANCE ................................................................................................................................................17
Limitations of a trial balance ........................................................................................................................17
Locating errors ..............................................................................................................................................17
Currency signs and underlining ....................................................................................................................17
A LOOK AT US GAAP .............................................................................................................................................18
Similarities: ...................................................................................................................................................18
Differences: ...................................................................................................................................................18
CHAPTER 3: ADJUSTING THE ACCOUNTS ................................................................................................... 25
1
, ACCRUAL-BASIS ACCOUNTING AND ADJUSTING ENTRIES ................................................................................................25
Fiscal and calendar years..............................................................................................................................25
Accrual -versus cash-basis accounting..........................................................................................................25
Recognizing revenues and expenses .............................................................................................................25
The need for adjusting entries ......................................................................................................................26
Types of adjusting entries .............................................................................................................................26
ADJUSTING ENTRIES FOR DEFERRALS ..........................................................................................................................26
Prepaid expenses ..........................................................................................................................................26
Unearned revenues .......................................................................................................................................27
ADJUSTING ENTRIES FOR ACCRUALS ...........................................................................................................................28
Accrued revenues ..........................................................................................................................................28
Accrued expenses..........................................................................................................................................28
Summary of basic relationships ....................................................................................................................29
ADJUSTED TRIAL BALANCE AND FINANCIAL STATEMENT .................................................................................................29
Preparing the Adjusted trial balance ............................................................................................................29
Preparing financial statements.....................................................................................................................29
ALTERNATIVE TREATMENT OF DEFERRALS ....................................................................................................................29
Prepaid expenses ..........................................................................................................................................29
Unearned revenues .......................................................................................................................................29
Summary of Additional adjustment relationships ........................................................................................29
A LOOK AT US GAAP .............................................................................................................................................30
Key points......................................................................................................................................................30
FINANCIAL REPORTING CONCEPTS .............................................................................................................................30
Qualities of useful information .....................................................................................................................30
Assumptions in financial reporting ...............................................................................................................31
Principles in financial reporting ....................................................................................................................31
Cost contraint................................................................................................................................................31
CHAPTER 4: COMPLETING THE ACCOUNTING CYCLE (CLOSING THE ACCOUNTS) .......................................... 32
THE WORKSHEET....................................................................................................................................................32
Steps in preparing a worksheet ....................................................................................................................32
Preparing financial statements from a worksheet .......................................................................................34
Preparing adjusting entries from a worksheet .............................................................................................35
CLOSING THE BOOKS ...............................................................................................................................................35
Preparing closing entries ..............................................................................................................................35
Posting closing entries ..................................................................................................................................37
Preparing a post-closing trial balance ..........................................................................................................38
THE ACCOUNTING CYCLE AND CORRECTING ENTRIES .....................................................................................................39
Summary of the accounting cycle .................................................................................................................39
Reversing entries – an optional step.............................................................................................................43
Correcting entries – an avoidable step .........................................................................................................43
CLASSIFIED STATEMENT OF FINANCIAL POSITION ..........................................................................................................43
Intangible assets ...........................................................................................................................................43
Property, plant and equipment .....................................................................................................................44
Long-term investments .................................................................................................................................44
Current assets ...............................................................................................................................................45
Owner’s equity ..............................................................................................................................................45
Non-current liabilities ...................................................................................................................................45
Current liabilities ...........................................................................................................................................46
2
, Financial statements .....................................................................................................................................46
REVERSING ENTRIES ................................................................................................................................................46
Reversing entries example ............................................................................................................................47
CHAPTER 18: FINANCIAL ANALYSIS, THE BIG PICTURE ................................................................................ 48
BASICS OF FINANCIAL STATEMENT ANALYSIS ................................................................................................................48
Need for comparative analysis .....................................................................................................................48
Tools of analysis ............................................................................................................................................48
Characteristics ..............................................................................................................................................48
Horizontal analysis........................................................................................................................................48
Vertical analysis ............................................................................................................................................50
RATIO ANALYSIS .....................................................................................................................................................51
Liquidity Ratios .............................................................................................................................................52
PROFITABILITY RATIOS ..................................................................................................................................53
SOLVENCY RATIOS .........................................................................................................................................55
Summary of ratios ........................................................................................................................................56
3
, CHAPTER 1: ACCOUNTING IN ACTION
Accounting activities and users
Accounting consists of three activities
1. IDENTIFICATION - select economic events (TRANSACTIONS)
2. RECORDING - Record, classify, and summarize = BOOKKEEPING
3. COMMUNICATION - Prepare accounting reports & Analyse and interpret for users
IDENTIFICATION
Economic events: Events that have a financial impact on a company or organization and can be
measured in monetary terms. They directly affect each company’s financial statements, including the
balance sheet, income statement, and cash flow statement.
ex. the launch of the new iPhone is not an economic event, but it has economic consequences. The sale
of an iPhone IS an economic event.
RECORDING
- Record, classify, and summarize
- Keeping a systematic, chronological diary of events
- The accounting process includes the bookkeeping function. Bookkeeping usually involves
only the recording of economic events. It is just 1 part of the accounting process.
COMMUNICATION
- After economic events are identified and recorded, financial information is communicated
- When you communicate about your numbers and it exceeds expectations, it can gain a lot of
money and possibilities
- A vital element in communicating economic events is the accountant’s ability to analyze and
interpret the reported information. Analysis involves use of ratios, percentages, graphs, and
charts to highlight significant financial trends and relationships. Interpretation involves
explaining the 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 (owners) use accounting information to decide whether to buy, hold, or sell ownership
shares of a company - Is Microsoft earning satisfactory income? How does Netflix compare in size
and profitability with Disney Plus?
- Creditors (suppliers, bankers) use AD to evaluate the risks of granting credit or lending money -
Will Thai Airlines be able to pay its debts as they come due?
= individuals, organizations, or financial institutions that lend money or extend credit to a
company or individual with the expectation of repayment in the future.
4
