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Financial Accounting Notes - Unit One
Chapter 1
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• Accounting is a system of identifying information, recording the information and
communicating the information
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▪ Want to reduce all the paper stuff into debits and credits,
deciphering it, putting it into a debit and credit format
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▪ Manipulate the information
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o Communicate the information by balance sheets and financial
statements
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o Internal users like managers, sales staff and controllers, people that
decide and operate the company
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o Third step: make the ethical decision
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o Rationalization and pressure end up being related
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o Paul Sarbanes & Michael Oxley created this
• Dodd - Frank Wall Street Reform
o To promote accountability
o End “too-big to fail” like banks and automotive companies
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o “too-big to fail” is like government pay out, where did they get their
money? The taxpayers, the government extorted the taxpayers
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Generally accepted accounting principles (US GAAP)
o The accounting rule book of how and why we do things
o Reliable, relevant and comparable information
o Why is this important?
▪ We don’t want to give our client’s wrong information
o Doing the same thing/process every time
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Principles and assumption of accounting
o Principles - measurement, full disclosure, revenue recognition, expense
recognition
▪ Measurement - cost is considered objective, what did it cost Sinclair
to have the desk in the classroom
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▪ Revenue recognition - buy something, and somebody owes
something 30 days from now
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The seller will recognize the cash today
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When earned
▪ Expenses recognition - when a company has an obligation to pay
them, buyer’s case
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o Assumptions - going concern, monetary unit, time period, business entity
▪ The Business going concern - if the business is a going concern,
the profit check is going in place
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▪ Monetary unit - the accounting record can be denominated into
currency
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▪ Time period - financial activity can be broken into months, quarters
and years
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▪ Cost benefit - is x worth the y
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• Does the disclosure cost more than the benefit?

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You have a $1 and you buy water, it cost $1 to buy that
water but a could have bought candy
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Business organization
o Proprietorship - single owner, sole owner, not business taxed
o Partnership - two or more partners, no longer a sole owner, not business
taxed
o Corporation - three or more, when capital is needed, inviting public to buy
shares in corporation, owners may hire people to be part of the day to day
stuff, limited liability
o LLCs provide higher liability protection than corporations
▪ Assets are protected
Accounting equation
o Assets = liabilities = equity
Asset - resources a company owns that have a value
Liability - things that are owed by a company, a claim by creditors against a
business
o Claims on assets by others that don’t own the company
Equity - claims on the assets by the people that own the company
Contributed capital - equity that is contributed by the owners, common stock
Retained earnings - dividends, revenues and expenses
Net income - revenues and expenses
Accounting Equation:

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• Income statements- revenues - expenses
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Statement of cash flows - looking at when and how much cash moved in and out
of the entity over the period of the time
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Headings
o Company name
o Name of the statement
o Date in proper format
Balance sheet - only a specific date
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Account is a record of the increases and decreases in a specific/individual
account
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• Ledgers are inside of accounts
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• Journal - where to post journal entries
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• Assets - anything a company owns that is worth something or that can help them
make money
• Liabilities- something we’re going to have to give up, an outside party has a claim
against us
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• Debits and credits
o Dead clerk
• Debits
o D - debits increase the following: the following are normal
o E - expenses
o A - assets
o D - dividends
• Credits
o C - increase the following the following are normal
o L - liabilities
o R - revenues accounts
o C - capital accounts / equity / common stock or retained earnings
• T account
o Left side -debits
o Right side - credits
• Whatever side is normal, is the side of the account that is increasing
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• Journalizing and posting transactions
o 4 steps

Take source documents, running it through the accounting equation,
recording the journal entry, and posting it to ledger
• PR - postal reference - posting reference
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• Summarize into a trial balance
• Balance of all debits and credits
o When adding the columns down, it should equal - if not, there’s a problem
o Summary of ending balanced in general ledger accounts created from the
journal entries
• For a statement, must have
THE COMPANY NAME
o Tell them what it is, name of the report
o Date for what the report is for
• Search for mistakes
o Make sure you add and subtract correctly
o Make sure the ledger is right
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Use each account
once and only once
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o Balance sheet - where we show all the assets, liabilities and equity
accounts, common stock
o (Cash flows)
• Equation: Beginning balance +- activity = ending balance
o Particularly in the retained earnings
• Income statement
o revenues, expenses = net income
o Revenues - expenses = net income
• Statement of retained earnings
o You put the net income at the beginning and add retained earnings and
subtract the dividends
o You get a new retained earnings number
• For the balance sheet
o Assets, liabilities, contributed capital
▪ Put new retained earnings in equity
o Looks like the accounting equation
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• Dollar signs are not un ledgers and journals
• First and last in the column as are going to have signs
Chapter 3
• Accounting equation - chapter 1
• Debits and credits - chapter 2
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Adjusting balance - chapter 3
Accrual
o Revenues are recognized when we have the right to get paid
o Expenses are shown when we get the benefit from what it is
Cash
o Not GAAP
▪ Generally accepted accounting principles

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There are four types of balance sheet accounts
o Prepaid expense
o Unearned revenue
o Accrued expense
o Accrued revenues
▪ All from the balance sheet
Principles, assumptions and constraints → where everything is linking back to,
therefore we do things
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Prepaid is an asset and gets debited
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Supplies is a prepaid
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o Recognize expenses in the period they give us benefit
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o Short term is anything less than a year
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Depreciation equation
o Asset cost - salvage value / life span
Salvage value - scrap value
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o Is often not the same value
o It’s an estimated value
Accumulated depreciation
o Contra account
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Unearned deferred revenues
We recognize revenue when we earn it/ have the right to it
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o Unrecorded receivable
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• Our right to get money in the future - receivable
o It’s an asset
o It’s increasing because we debit it
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• Paid cash before hand
o Prepaid insurance/expense
▪ At the end of each period, how much of the asset now become an
expense
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o Unearned revenues
▪ Got a customer deposit
• How much of that money have earned? how much do we
have the right to?
o Decrease liability, increase revenues
• Paid for cash after expense
▪ Accrued - cash has not changed hands, but you have the right to
the money
o Accrued expenses
▪ Uses payroll
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o Reid
• Permanent accounts
o Assets, liabilities, common stock and retained earnings
• Steps to closing
o Close credit and debit balances
• Chapters 2 - 1 thru 4
• Created journal entries
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Posted into ledgers
• From the ledgers, we got the unadjusted trial balance
• Chapter 3, looking at liabilities and asset accounts and looking for adjustments
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Takes us to adjusting process
Then we have an adjusted trial balance and we then get financial statements
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o Buying something you can hold
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• Perpetual systems
o Updates the accounting record after every purchase or sale
• Periodic
o Only updates the end of the accounting cycle
• Credit period is typically a 30-day window
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o Allow the buyer to pay less than the invoice
o If you pay the invoice in the time of the discount
• Buyer for discount- purchase discount
o Seller - sales discount

The numbers will be the same
Purchase discounts:
• 2/10, n/30
o How are credit terms are displayed?
o from the invoice date, you have 10 days to pay 2%, but the net is due in
30 days
• 1/15, n/45
o 15 days the 1% discount is available and 45 is the end of the credit period
• ⅗, n/15
o 3% discount in 5 days and the whole thing is due in 15 days
• On account - credit transaction
• Credit terms - am I the buyer or the seller
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• Purchase returns - want your money back
o Reduce accounts payable
• Allowances: inducement by seller for the buyer to keep the product
• Fob - free on board
o When does title of the property pass?
o When does the piece of property stop being the seller’s property and
becomes the buyer’s property?
o Depends on the shipping terms
o Need to know the shipping point, the seller's loading dock and the buyers
loading dock
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• Title is so important because it’s the buyer’s risk
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• Depending if you’re a buyer or a seller, the journal entries will be different
• Gross profit - net sales minus cost of goods sold
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• Revenues transaction and cost transaction for the seller
• Seller has sales discounts
• Buyer has purchase discount
• Sales discount - contra revenue account
o Contra account - the opposite of what it’s containing to
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• Sales returns and allowance
o Merchandise got returned to the seller
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o Allowance
▪ Reduce the selling price
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▪ Sell must record the net effect
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For a merchandiser
• Things that might not match up
o Theft (shrink)
o Damaged and you might not document it
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• Sales is a revenue account
• Take all credit balance accounts and debit to zero amounts in the income
summary
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• Balance sheet and income statement is what adjusting entries must impact
o What is the balance and what should it be?
o Is it increasing or decreasing?
o Find the other account and do the opposite
• Liquidity - current assets and how quickly can we make stuff into cash
o What can we sell to make cash?
o Can you convert it to cash?
o What are the liabilities we’re going to pay first?
• Notes payable are long term debts and less liquid
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• Goods on consignment
o You retain merchandise but somebody else is selling it for you
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• We’re looking at the matching principle
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o Matching costs with sales
• Management needs to decide
o What inventory are we going to use on a basis?
▪ Anything necessary to get the item ready to be sold
o Choose a costing methodology
o Do a periodic or perpetual inventory
o Use of market values or other estimates
• Most companies use fifi, recognizing their oldest cost first
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o You cannot switch methodologies
o You better have a reason why you’re changing
• Accounting information had to be arc, reliability, relevant and comparable
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• If we have a rising cost curve, we’re probably going to keep it historical, not going
to do a write up to cost
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• Lower cost or market can be applied for three ways
o Each item
o Major categories
o Whole inventory
• Why are we doing this?
o If I had to replace the units today what would the market be today?
• We use lock based on the conservatism principle, not going to overstate the
value of our assets
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• Another concept to come up with cost
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Inventory turnover=
o Costs of goods sold/ average inventory
o Get average by (beg inventory add ending inventory) /2
▪ Number of times per year we turn over our inventory
o Wants the turnover number to be High because it means you’re moving
inventory quickly
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Chapter 6
• Chapters 6 -11 are All about balance sheet accounts
o How do I make individual adjusting entries to determine the correct
balance?
• Internal control system
test question!
o Policies managers use to protect assets, ensure reliability accounting,
uphold policies and promote efficient operations
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o Puts restrictions on publicly traded company
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o Private - privately held by a group of people
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o This was to protect consumers that were buying stock, beef up internal
controls process, protect the investors
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o Who does what?
o Maintaining records
▪ RCRA
▪ Reliable, comparable, relevant
o Insure assets & bond key employees
▪ Bandings - protecting assets from employees stealing
o Separate record keeping from custody of assets
o Divide responsibility for related transactions
o Applying technological controls
o Perform regular and independent reviews
▪ 3rd person
Technology pros
• Technology should be able to reduce errors
• Increase ecommerce
• Testing of the records
• Allows for separation of duties

Technology downsides
• Not paper intensive, lost paper trail
Limitations of internal control
• Human error
o non - intentional
• Human fraud
o Intent
o You must have intent
o Usually, there’s a necessity for malicious intent
• Human fraud, triple threat
o Pressure, opportunity, rationalization
Control of cash
• The person handling cash needs to be separate from whose accounting it
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• Cash over short - typically an expense account, debit balance
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Plug account that is used to force cash and sales to balance
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o Also track, who is on the register and see a trend
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o Cashier deposits the money in a bank
▪ Needs to go to the bank asap
o The recordkeeper record the amounts received in the accounting records
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o Create the account petty cash
▪ Take money out of cash
• Two accounts used - petty cash and cash
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▪ Imp rest - fixed dollar amount, balance
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Setting it up or increasing and decreasing is the only time you make a
petty cash journal entry
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Bank reconciliation:
• Two account balance
o Bank side and general ledger
o Two numbers are normally not the same
o Looking at bank statement to see what activity is not on the general ledger
number
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• Balance from bank statement and book balance
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• Post to individual sub ledgers and to controlling account
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• Advantage to seller - they get their cash right away
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• Installment sale - circumstance where you pay overtime and there’s an
interest charge over time
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o Reduce account receivable account
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o Recovering bad debts - we do two journal entries
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• Allowance method
o Does a better job to matching them up?
o What are we going to collect?
o At the end of each period, we estimate total bad debt expense for
that period’s sales
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o Bad debt account used once
o Credit allowance for doubtful accounts
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▪ Uncollectible accounts
o Write it off to allowance
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Matching vs materiality
• Matching principle
o Expenses be recorded in the same accounting period as the sales they
helped produced
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o Target number does not amount of adjustment
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• Aging of receivables method
o Classify each receivable by how long it’s past due
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Like unearned revenue
o Current and long term
▪ Current - anything due within a year
▪ long term- anything due after a year
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• Required to recognize expenses when incurred
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Uncertainty of liabilities
o Who to pay?
o When to pay
o How much to pay
• Current known liabilities
o Accounts payable, sales tax payable, unearned revenue, short-term
note payable, payroll liabilities, multi-period known liabilities
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o Date of the note
o End of period
o Maturity date
• Computing employee payroll
• State unemployment tax- insurance program
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Wrongfully terminated, you have the right to file for unemployment
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• Warranty plans are hard because we have estimate those by experience on
those warranty coverages
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• Contingent liabilities
o Before this occurs, something else must happen
o Not liable for it until court says you are
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• Disclosure to public and/if probable, can I quantify the dollar amount
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• Contingent expense, an amt I’m going to have to pay in
the future
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you’re also going to have to know how to close
the note out, close the payable and expense account out as well
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Method (THIS WILL NOT BE ON THE TEST)
o Aging
o Percent of sales
▪ Income statement focused account driven by matching
principle
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• Disposal
o Depreciation, selling asset, calculate the remaining depreciation
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o Cost account when done disposing - 0 amount
o Accumulated depreciation amount -0 amount
o Cost less ad for net book value
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▪ Proceeds less than net book value - loss
▪ Same amount - broke even
Chapter 9
• Know the knuckles, know how many days are in each month
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Unit Four - Financial Accounting
Chapter 10
• Long term notes payable
o There can be a payment at the end or there can be payments from the note
date to the note maturity date
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And then pay principle at the end
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• The value tables allow you to compute how much interest there is
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More of the loan goes to
principal
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• Mortgage
o Includes other assets at stake, borrowing
o They’re collateralized
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Give the lender security
that they’re going to get something in return
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• Convertible - converting to stock

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Term - pay it all at the end
Serial - payments over the course of the time
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o Separate from owner
o Has rights and privileges
▪ To engage in contracts, all the rights to an individual
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o Has the right to free speech
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• Article of corporation - the max number of shares a company could issue
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• Outstanding - how many shares are held by shareholders
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If they’re the
same, there’s no treasury stock
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• Bonds, record stock at par or stated value
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o Meant as a mathematical place holder to give us a dollar amount
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• Par and stated at interchangeable
• Common stock transaction journal entry
o you get cash, - what do you get? Most likely a debit
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o Common stock will be a credit
o Common and preferred - the exam will have more
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o Paid - in capital
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o Contained - running net income
• Retained earnings
o Net income, running total

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