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Accounting Notes:

Chapter 1
Introduction to Financial Accounting:
Annual report- Magazine that contains descriptive information about company and the general
purpose of financial statements.
Balance Sheet- Financial Position of an enterprise at a particular point in time.
Income statement- Financial Performance of an enterprise over a period of time.
Accounting Assumptions:
Accounting entity Activities of the entity are separate from those
of its owners/members
Accounting period Life of business is divided into discrete time
periods of equal length
Monetary Measure economic activity by a common
denominator
Historical Cost Transactions are initially recorded at their
original cost
Going Concern Assumes continued operation of accounting
entity into foreseeable future
Materiality A piece of information is said to be material if its
omission or misstatement could influence the
economic decisions of users made on the basis
of the financial statements

Chapter 2
Measuring & Evaluating Financial Position &Performance
1. Understand the terms, format, and function of the balance sheet & the income statement
2. Identify the components of financial statements
3. Describe the relationship between the balance sheet and the income statement
4. Understand the implications of the decision to record expenditure as an asset or as an expense
5. Understand the differences between cash profit and accrual profit.




Asset: A resource that is controlled by an entity as a result of past events, and from which future
economic benefits are expected to flow to the entity.
Current Assets: expect to realise benefits in 12 months, Non-current: realise benefits over longer
period.
Liabilities: A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying economic
benefits.
Current Liabilities: paid off within a year of balance sheet date, Non-current: remain liabilities for at
least next year.
Distinction of current and non-current assets helps financial statement users to asses short term
financial position.
Working Capital: Current Assets Current Liabilities (low or negative WC indicates short term
financial difficulties).
Current Ratio: Current Assets Current Liabilities
Equity: the residual interest in the assets of the enterprise after deducting all its liabilities.
Assets = Liabilities + Owners Equity
Shareholders Equity = Share Capital + Retained Profits (RP beginning of period + net profit dividend)
Income statement accounts are closed and their balances transferred to the retained profits
account (on the balance sheet) at the end of each accounting period- LINKS THE TWO STATEMENTS
TOGETHER.
Income Statements- Shows the results of business operations over a specific time period
Revenue is gross inflows of economic benefits during the period arising in the ordinary
activities of an entity when those inflows result in increases in equity other than those
relating to contributions from equity participants
Expenses represent decreases in the entitys wealth. They are incurred in order to earn
revenue. DOES NOT INCLUDE DIVIDENDS





Chapter 3
Double Entry System
Type Normal Increasing Decreasing
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Shareholders Equity Credit Credit Debit
Revenue Credit Credit Debit
Expenses Debit Debit Credit


Journal entries- are essentially, a shorthand version on transaction analysis.
Chapter 4
Record Keeping
Accounting Cycle:
1. Source Documents- getting all the information, bank statements, receipts, cheques, invoices
for purchases and sales.
2. Journal Entries- Recording transactions in journal- Dr and Cr.
3. Post to Ledgers- t Accounts- writing what caused the change in the account and opening and
closing balances.
4. A Trial Balance- is an initial check to see if any mechanical errors have occurred. See if Dr =
Cr
5. Adjusting Journal Entries- adjust unearned revenue, prepayments, accrued revenues and
expenses.
6. An Adjusted Trial Balance
7. Closing Journal Entries- closing off revenue and temporary accounts by P&L statement to
find retained profits.
8. Post-Closing Trial Balance- Include new retained profits into trial balance
9. Financial Statements- income statement and balance sheet.
Note: For income statements title must be in format of Income Statement for the month ending 31
May 2012
For balance sheets- Balance sheets as at 31 May 2012



Chapter 5
Accrual Accounting Adjustments
Accrual accounting records:
Revenues when they are earned, not received.
Expenses when they are incurred not paid.
Some items that have no cash flow effect.
This is different to cash accounting which records revenues and expenses when cash is received or
paid.
Unearned Revenue- Cash received in advance of earning revenue (magazine subscriptions,
insurance premiums etc.)
E.g. On 31 May a company received $1200 for the service to be provided in the future
Dr Cash $1200, Cr Unearned Revenue $1200
$100 of services provided
Dr Unearned Revenue $100, Cr Revenue $100
Prepayment- Cash paid in advance of incurring expense (office supplies, prepaid insurance and
rent)
E.g. on 31 May a company purchased office supplies of $1000
Dr Office Supplies $1000, Cr Cash $1000
At 30 June, $300 of the office supplies remained, i.e. $700 had been consumed
Dr Office supplies expense $700, Cr Office Supplies $700.
Accrued Revenue- Revenue has been earned but cash will not be received until the following
period (commission earned but not received, interest earned but not received).
E.g. Orange company deposited $300 000 with a bank at 10 per cent per annum and interest is paid
on 1 March every year and the next payment of interest will be received on 1 March 2013.
Dr Interest Receivable $10,000, Cr Interest Revenue $10,000
After interest earned:
Dr Cash $30,000, Cr Interest Receivable $10,000, Cr Interest Revenue $20,000.


Accrued Expense- Expense has been incurred but cash will not be paid until the following period
(interest payable on loan, wages earned by employees but not paid till end of period).
E.g. A firm pays weekly wages of $50 000 each Friday (25 June,2 July). What journal entries will the
firm make on 30 June 2012and 2 July 2012?
25
th
June: Dr Wages Expense $50000, Cr Cash $50000
30
th
June: Dr Wages Expense $30000 Cr Wages Payable $20000
2
nd
July: Dr Wages Expense $20000 Cr Wages Payable $30000 Cr Cash $50000
Contra Account is paired with and follows its related account- One is Dr and one is Cr. (Accounts
Receivable and Allowance of Doubtful Debts, PPE and Accumulated Depreciation).
Allows users to understand the consumption of on assets economic value, changes in level of
doubtful debts etc.