ACC 100 Introductory Financial Accounting

Chapter 1
Definitions
Accounting: the process of identifying, measuring, and communicating economics information to
various users
Financial accounting: the branch of accounting concerned with providing management with
information to facilitate planning and control
Financial accounting: the branch of accounting concerned with the preparation of financial
statements for outsider use
Organization: collection of individuals pursuing the same goal or objective
Share: a certificate that acts as ownership in a corporation
Bond: a certificate that represents a corporations promise to repay a certain amount of money
and interest in the future
Capital stock: indicates the owners contributions to a corporation
Shareholder: someone who buys shares in a company
Creditor: someone to whom a company/person has a debt
Revenue: inflows of assets resulting from the sale of products and services
Expense: outflows of assets resulting from the sale of goods and services
Dividends: a distribution of the net income of a business to its owners
Retained earnings: the part of owners equity that represents the income earned less dividends
paid over the life of an entity
Owners equity: the owners claims on the assets of an entity
Shareholders equity: the owners equity in a corporation
Asset: a future economic benefit to an organization
-expected to be converted into cash or used up within one year
-listed in order of liquidity
Liability: an obligation of a business, usually expected within a year
-listed in order of liquidity
-long terms are expected to be paid after one year
Types of Businesses
1. Sole proprietorship: a business with one owner
2. Partnership: a business owned by two/more individuals and with the characteristic of
unlimited liability
3. Corporation: a form of entity organized under the laws of a particular province of the
federal government; ownership evidenced by shares
4. Non-business entity: organization operated for some purpose other than to earn a profit
3 Major Financial Statements
1. Balance sheet: the financial statement that summarizes the assets, liabilities, and owners
equity at a specific point in time
-a snapshot of companys financial position
2. Income statement: a statement that summarizes revenues and expenses
-summarizing financial activities
3. Statement of retained earnings: the statement that summarizes the income earned and
dividends paid over the life of a business
Generally Accepted Accounting Principles (GAAP)
Economics entity concept: the assumption that a single, identifiable unit must be accounted for
in all situations
-must keep personal and business accounts separate
Cost principle: assets are recorded at the cost to acquire them

Going concern: the assumption that an entity is not in the process of liquidation and that it will
continue indefinitely
Monetary unit: the yardstick used to measure amounts in financial statements, the dollar
Time period: artificial segment on the calendar, used as the basis for preparing financial
statements
Operating activities -> generating revenue, cash flows from purchases & sales-> current assets
& liabilities
Investing activities -> buying assets , uses of cash to procure future benefits-> long term assets
Financing activities -> issuance & payment of LTL & shares, sources of cash-> long term liabilities
& shareholders equity

ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

NET INCOME = REVENUE EXPENSES
STATEMENT OF RETAINED EARNINGS = BEGINNING BALANCE + NET INCOME
DIVIDENDS

Chapter 2
Main objective of financial reporting = provide information for decision making
Secondary objectives = assess investor/creditor cash receipts
-Assess cash flows to company
-Reflect resources and claims to them
Qualitative Characteristics to Make Accounting Info Useful:
1. Understandability: to those willing to take the time to understand it
2. Relevance: has capacity to make a difference
3. Reliability: represents what it is supposed to
-verifiability -> free from error
-representational faithfulness -> info that corresponds to an actual event
-neutrality -> the info should not be slanted in any way
-conservatism - > when in doubt, err on the negative side
4. Comparability: allow comparisons between companies
5. Consistency: allow comparisons between accounting periods in a company
6. Materiality: will it make a difference to the decision maker? Size of error
7. Benefit vs. Cost: benefit of accounting info should exceed its cost
Operating cycle: the period of time between the purchase of inventory and the collection of any
receivable from the sale of the inventory
Working capital: signals companys ability to pay creditors on a timely basis
Current ratio: allows comparability of the liquidity of company
Liquidity: the ability of company to pay its debts as they come due
Profit margin: or return of sales, shows the profitability of a business

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
PROFIT MARGIN = NET INCOME / SALES

Chapter 3
2 types of events:
1. external event: event involving interaction between entity and environment
2. internet event: event occurring entirely within entity

transaction: any event that is recognized in a set of financial statements

How to recognize an event as a transaction in the records:
1. the event must be measurable to be recognized
2. external events involves exchange of assets & liabilities between entity & external parties
(ex. paying rent fee)
3. internal events are where the effects on the entity can be reliably measured (ex. incurring
losses due to natural disaster)
source document: a piece of paper that us used as evidence to record a transaction (ex. invoices,
cash register tape)
retained earnings: the income earned & accumulated/retained in the company
Types of Transactions: (refer to p.95)
1. issuance of capital stock: buying shares
Cash
100 000
Capital Stock
100 000
2. acquisition of equipment: buying equipment for the company (ex. buying gym equipment)
Equipment
100 000
Notes Payable
100 000
3. purchase of supplies on credit: buying supplies for the company (ex. buying towels)
Supplies (Inventory)
3 000
Accounts Payable
3 000
4. prepayment for rent: paying rent in advance
Prepaid Rent
18 000
Cash
18 000
5. sale of day passes for cash: customers one day access to the companys facilities
Cash
15 000
Retained Earnings
15 000
6. rental of studio space and court time to customers on credit: renting a facility on credit
Accounts Receivable
5 000
Retained Earnings
5 000
7. sale of annual membership for cash: selling memberships to customers on cash
Cash
48 000
Unearned Membership Fees
48 000
8. payment of wages & salaries: paying employees
Retained Earnings
10 000
Cash
10 000
9. payment of utilities: paying utility expenses
Retained Earnings
1 000
Cash
1 000
10.collection of accounts receivable: collecting payment from customers on credit
Cash
4 000
Accounts Receivable
4 000
11.payment of dividends: paying shareholders
Retained Earnings
2 000
Cash
2 000
Cost principle: requires to record an asset at the price it was bought, carried at its original price
(more objective)
-must continue to keep this amount until it is disposed of

Trans

Cash

Assets
Equipme Suppli

Prepai

A/R

A/P

Liabilities
Unearned

Notes

Shareholder's
Equity
Capital Retaine

No.
1
2
3
4
5
6
7

nt
100
000
(50
000)

d Rent

150 000

(18
000)
15 000

10
11

4 000
(2 000)
86 000

Stock
100
000

3000
18 000
5 000

8
9

Payable

d
Earning
s

100 000
3 000

48 000
(10
000)
(1 000)

Total

es

Membershi
p Fees

15 000
5 000

48 000

(10
000)
(1 000)
(4
000)

150 000
3 000
258 000
258 000

18 000

ASSETS

1 000 3 000

48 000
151 000

100 000

(2 000)
100
000
7000
107 000

258 000

= LIABILITIES
SHAREHOLDERS EQUITY

*note: accounts payable and notes payable are different. Accounts payable is a liability that can
be paid off within a year. Notes payable is a liability that is paid off in a span of over a year (long
term liability vs. short term liability)*
*Sales of memberships is a liability b/c the cash has been received but the service of the
transaction hasnt been performed yet -> obligation of the company to pay off*
Account: record used to accumulate late amounts for each individual asset, liability, revenue,
expense, and component of shareholders equity
-ex. capital stock, retained earnings, dividends
Chart of accounts: a numerical list of all accounts used by a company
-to organize a large # of accounts
100-199: ASSETS
101:
Cash
102:
Accounts Receivable
200-299: LIABILITIES
201:
Accounts Payable
202:
Unearned Revenue
300-399: SHAREHOLDERS EQUITY
301:
Capital Stock
T-accounts: one table for each account, resembles a T
Assets
Liabilities
(Credit)
(Debit)
Decrease (Debit)
(Credit)
Increases +
sDecreases Increases +

Shareholders' Equity
(Debit)
Decreases -

(Credit)
Increases +

Debit: an entry on the left side of an account

Credit: an entry on the right side of an account
Revenue
Expenses
(Debit)
(Credit)
(Debit)
(Credit)
Decreases Increases +
Increases +
Decreases -retained earnings -> increase in retained earnings
-expenses & dividends -> decrease in retained earnings

Dividends
(Debit)
(Credit)
Increases+
Decreases -

Double-entry system: a system of accounting in which ever transaction is recorded with equal
debits and credits and the accounting equation is kept in balance
Journal: a chronological record of transactions, also known as the book of original entry
General journal: the journal used in place of a specialized journal (specialized journals record the
same kind of transactions)
Posting: the process of transferring amounts from a journal to the ledger accounts
Ledger: a book, file, hard drive, or other device containing all the accounts
Cash
100 000
50 000
15 000
18 000
48 000
10 000
4 000
1 000
2 000
^ex. of a cash ledger
Trial balance: a list of each account and its balance; used to prove equality of debits and credits
-not a financial statement, doesnt have adjusting entries in it
UBGASIUL Health Club
Unadjusted Trial Balance
January 31, 2008
Debit
Credit
Cash
86 000
A/R
1 000
Supplies
3 000
Prepaid Rent
18 000
A/P
3 000
Unearned Membership Revenue
48 000
Notes Payable
100 000
Capital Stock
100 000
Dividends
2 000
Day Pass Revenue
15 000
Rental Revenue
5 000
Wages Expense
10 0000
Utilities Expense
1 000
271 000
271 000
^ex. of unadjusted trial balance