Accounting summary
Chapter 1
Learning objective 1: Explain why accounting is important and list the users of accounting information
Accounting: the information system that measures business activities, processes the information into
reports, and communicates the results to decision makers. Divided into two major fields:
- Financial accounting: provides information for external decision makers.
- Managerial accounting: provides information for internal decision makers.
Creditor: any person or business to whom a business owes money.
Types of accountants:
- Certified public accountants (CPAs): licensed professional accountants who serve the general
public. Work for accounting firms, businesses, government entities or educational institutions.
- Certified management accountants (CMAs): certified professionals who specialize in
accounting and financial management knowledge. Typically work for a single company.
Learning objective 2: Describe the organizations and rules that govern accounting:
Organizations and rules that govern the accounting profession in the U.S.:
- Governing organizations: Like the Financial Accounting Standards Board (FASB): the private
organization that oversees the creation and governance of accounting standards in the U.S..
This board works with the Securities and Exchange Commission (SEC): U.S, governmental
agency that oversees the U.S. financial markets.
- Generally Accepted Accounting Principles (GAAP): accounting guidelines, formulated by the
FASB: the main U.S. accounting rule book.
- The Economic Entity Assumption: an organization should stand apart as a separate economic
unit, separated from its owner. Ways in which a business can be organized:
o Sole Proprietorship: a business with a single owner
o Partnership: a business with tow or more owners, not organized as corporation
o Corporation: a business organized under a state law that is a separate legal entity
o Limited-Liability Company (LLC): a company in which each member is only liable for
his or her own actions
- The cost principle: states that acquired assets and services should be recorded to their actual
cost (to the price you actually paid for it)
- Going concern assumption: assumes that the entity will remain in operation for the
foreseeable future.
- Monetary unit assumption: requires that the items on the financial statements be measured in
terms of monetary unit.
- International Financial Reporting Standards (IFRS): a set of global accounting guidelines,
formulated by the International Accounting Standards Board (IASB).
- Ethical considerations: checked through audits: examinations of a company’s financial
statements and records. Due to ethical scandals, the Sarbanes-Oxley Act (SOX) was created: it
requires companies to review internal control and take responsibility for the accuracy and
completeness of their financial reports.
Learning objective 3: Describe the accounting equation, and define assets, liabilities, and equity
Basic accounting equation: Asset = Liabilities + Equity
Asset: an economic resource that is expected to benefit the business in the future.
Liabilities: debts that are owed to creditors.
Equity: the owner’s claim to the assets of the business. Increases with owner’s capital and revenue,
decreases with expense and owner’s withdrawals.
,Net income: revenue > expenses. Net loss: expenses > revenue.
Learning objective 4: Use the accounting equation to analyze transactions
Transaction: an event that affects the financial position of the business and can be measured in
reliably in dollar amounts. Steps to analyze transactions:
1. Identify the accounts and the account type
2. Decide if each account increases of decreases
3. Determine if the accounting equation is in balance
Accounts payable: a short-term liability that will be paid in the future.
Accounts receivable: the right to receive cash in the future from customers for goods sold or for
services performed.
Learning objective 5: Prepare financial statements
Financial statements: business documents that are used to communicate information needed to make
business decisions. Four kinds of financial statements:
- Income statement: reports net income or net loss of the business for a specific period.
- Statement of owner’s equity: shows the changes in the owner’s capital account for a specific
period.
- Balance sheet: reports on assets, liabilities, and owner’s equity of the business as of a specific
date
- Statement of cash flows: reports on a business’s cash receipts and cash payments for a specific
period
,Learning objective 6: Use financial statements and return on assets (ROA) to evaluate business
performance
Return on assets (ROA): measures how profitably a company uses its assets. How much profit a
company produces per every dollar of asset.
ROA = net income / average total assets
Chapter 2
Learning objective 1: Explain accounts as they relate to the accounting equation and describe common
accounts
Account: a detailed record of all increases and decreases that have occurred in an individual asset,
liability, or equity during a specific period.
Asset accounts:
- Cash
- Accounts receivable
- Notes receivable: a written promise that a customer will pay a fixed amount of money and
interest by a certain date in the future.
- Prepaid expense: a payment of an expense in advance.
- Equipment, furniture, and fixtures
- Building
- Land
Liability accounts:
- Accounts payable
- Notes payable: a written promise made by the business to pay a debt, usually involving
interest, in the future.
- Accrued Liability: a liability for which the business knows the amount owed but the bill has
not been payed
- Unearned revenue: a liability created when a business collects cash from customers in
advance of providing services or delivering goods
Equity accounts:
- Capital
- Owner withdrawals
- Revenues
, - Expenses
Chart of accounts: a list of all of a company’s accounts with their account numbers. Asset numbers
usually start with a 1, liabilities with 2, equity with 3, revenues with 4 and expenses with 5.
Ledger: the record holding al the accounts of a business, changes in those accounts, and their balance.
Learning objective 2: Define debits, credits, and normal account balances using double-entry
accounting and T-accounts
Double-entry system: a system of accounting in which every transaction affects at least two accounts.
T-account: a summary device that is shaped like a capital T with debits posted on the left side of the
vertical line and credits on the right side of the vertical line.
Normal balance: the balance that appears on the increasing side of an account.
Learning objective 3: Record transactions in a journal and post journal entries to the ledger
Source document: provides the evidence and data for accounting transactions.
Transactions are first recorded in a journal: a record of transactions in date order. After that, the data
must be transferred to the ledger. This process from journal to ledger is called posting. Example:
Steps for journalizing and posting:
1. Identify the accounts and the account type
2. Decide whether each account increases or decreases using the rules of debits and credits
3. Record the transaction in the journal
4. Post the journal entry to the ledger
5. Determine whether the accounting equation is in balance
Compound journal entry: a journal entry that has multiple debits and/or multiple credits.
An alternative for the T-account is the four-column account:
