Financial Accounting I Revision Notes

Accounting is the art of communicating financial information about a business entity to users such as
shareholders and managers. The communication is generally in the form of financial statements.

Assets are the things a company owns that has value. There are Non-current (fixed) Assets that are
not intended to be consumed within one year of the balance sheet. There are Current Assets that
are expected to be consumed within one year of the balance sheet.

Liabilities are the amounts that are owed by the business.

Capital (equity) is the amount invested in a business by its owner(s).

The Accounting Equation: Assets = Liabilities + Owner’s Equity + Revenue - Expense

Bookkeeping is the recording of financial transactions.

Single entry bookkeeping system is where transactions are entered into only one account.

Double entry bookkeeping system is where every transaction involves debiting one account and
crediting the other.

Generally the types of accounts below are increased with a debit. You might think of
D – E – A – L when recalling the accounts that are increased with a debit.

Dividends (Draws)
Expenses – (Advertising, Bank Fees, Depreciation, Payroll, Rent, Office Expense)
Assets – (cash, cash in bank, building, inventory, prepaid rent, goodwill, accounts receivable)
Losses

Generally the types of accounts below are increased with a credit. You might think of G
– I – R – L – S when recalling the accounts that are increased with a credit.

Gains
Income
Revenues – (Sales Revenue, Sales Returns & Allowances, Sales Discounts, Interest Income)
Liabilities – (accounts payable, bank loan, Notes Payable bonds payable, accrued interest)
Stockholders/Owner's Equity – Amount invested in business by stockholders.

To decrease an account you do the opposite of what was done to increase the account.
For example, an asset account is increased with a debit. Therefore it is decreased with a credit.

A Trial Balance is the listing of all the accounts taken place in a certain period. The total balance of
debits and credits should equal each other to prove accuracy of records.

A Balance Sheet (statement of financial position) is a financial statement of a business or institution

that lists assets, debts, investments, and net worth.

An Income Statement (P&L statement) is the summary of a company's revenues and expenses during
a certain accounting period. Subtracting the total expense from total revenue gives the company's
net profit.