FAC 1
Financial Accounting
Tracie Miller-Nobles, Brenda Mattison, Ella Mae Matsumura
6 th edition can also be used for 5 t h edition.
ISBN: 9-781292234403
Summary:
chapters: 1,2,3,4,5, 12, 14 & 15 (No appendixes)
Additional notes from teachers
All information provided in this summary is derived from the books of Miller-Nobles, Mattison and
Matsumura, all definitions are directly copied from the book.
At the end of this document, all definitions are listed in alphabetical order where you can test if you
are familiar with all definitions. This summary does include the mind maps for every chapter &
answers to the following problem questions of both 5th edition and 6th edition. Some are partially
made.
5th edition 6th edition
P2-41; P3-45; P4-28A; P5-39B; P14-41B; P3-35A; P4-35B; P4-36B; P5-39B
P14-46B
Created by L. ten Bosch.
Further distributing of this summary is illegal due to copyrights.
Mind map (not ch5) & definitions & answers
,Chapter 1 – Accounting and the business environment
1-1 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.
- Measures business activities
- Processes the information into reports
- Communicates the results to decision makers
Financial accounting is the field of accounting that focuses on providing information for external
decision making.
- Investors
- Creditors
- Taxing authorities
Managerial accounting focuses on providing information for internal decision making.
- Managers
- Employees
- Individuals
- Businesses
1-2 What are the organizations and rules that govern accounting
Generally accepted accounting principles (GAAP) are accounting guidelines for the U.S; the
International Financial Reporting Standards (IFRS) is for Europe.
- Be relevant, allowing users to make a decision
- Have faithful representation by being complete, neutral, and free from error
- Cost principle
- Going concern assumption
- Monetary unit assumption
The economic entity assumption is an organization that stands apart as a separate economic unit
- Sole Proprietorship
o 1 owner and is personally liable
- Partnership
o 2 or more owners are personally liable
- LLC
o One or more members or partners
o Not personally liable
- Corporation
o Organized under state of law; separate legal entity
o One or more stockholders but
o separation of ownership and management
o Not personally liable
o Corporation tax
o Government regulation
,1-3 What is the accounting equation
The accounting equation is the basic tool of accounting, measuring that resources of the business
(what the business owns or has control of) and the claims to those resources (what the business
owes to the creditors and the owners.
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑒𝑞𝑢𝑖𝑡𝑦
Assets
- Economic resource that is expected to benefit the business in the future
- Cash, inventory, furniture, land
Liabilities
- Debts that are owned to creditors
- Accounts payable, notes payable, salaries payable
Equity
- The owners’ claims to the assets of the business also called stockholders’ equity
- Contributed capital & revenues increases equity
- Dividends and expenses decreases equity
1-4 How do you analyse a transaction
A transaction is an event that affects the financial position of the business and can be measured with
faithful representation
Step 1 Identify the accounts and the account type
Step 2 Decide if each account increases or decrease
Step 3 Determine if the accounting equation is in balance
Stockholders contribute cash Purchase of land for cash
Increases both cash and common stock Decreases cash and increases land
Purchase office supplies on account Earning of service revenue for cash
Increases office supplies and accounts payable Increases cash and service revenue
,Earning of service revenue on account Payment of expenses with cash
Increase of service revenue and Accounts receivable Decrease of cash increase of expenses
Payment on Account Collection on account
Decreases cash and accounts payable Increases cash and decreases receivables
Payment of cash dividend
Decreases cash and dividends
1-5 Prepare financial statements
Financial statements are business documents that are used to communicate information needed to
make business decisions.
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
, Tax
Creditors
authorities Corporation
Sole
Investors proprietorship
Managers Financial
accounting Partnership
Managerial Economic entity
Employees Assumption
accounting
Individuals Limited-Liability
Accounting
company
Going concern
principle Assets
Cost principle
GAAP / accounting
Liabilities
IFRS equation
Faithful
representation
Equity
Monetary Unit
assumption
Stockholders’ contribution
4 financial Payment of dividends
Purchase of office
statements
Collection on Account supplies on account
Transactions Purchase of land for cash
Payment on account
Payment of expenses for Earning of service
cash revenue on account
Earning of service revenue
for cash
, Chapter 2 – Recording Business transactions
Recording of transactions is based on source documents that provide proof of the financial position
of the business
2-1 What is an account
An account is a detailed record of all increases and decreases that have occurred in an individual
asset, liability or equity during a specific period. The accounting equation exists of three accounts
- Assets
- Liabilities
- Equity
Assets
- Cash
- Accounts Receivable Customers promise to pay in the future
- Notes Receivable Written promise a customer will pay + interest
- Prepaid Expenses
- Land
- Building
- Equipment, Furniture, and Fixtures
Liability
- Accounts Payable Promise of the business that it will pay in the future
- Notes Payable Written promise by the business to pay + interest
- Accrued Liability An owed amount but not paid
o Taxes payable, rent payable, salaries payable
- Unearned Revenue Collected revenue where no services/goods have
been provided
Equity
- Common Stock
- Dividends
- Revenues
- Expenses
o Rent expenses, Salaries expenses, and utilities expenses
The chart of accounts is a list of all of a company’s account with their account numbers. A Ledger is a
collection of all the accounts, the changes in those accounts and their balances.
