Comprehensive Accounting Principles: Assets, Liabilities, Equity, and Financial Statements

Accounting Equation

Assets = Liabilities + Stockholders' Equity

Assets

Resources owned by a company that provide future economic benefit.

Examples of Assets

Cash, Accounts Receivable, Inventory, Equipment.

Liabilities

Amounts owed to outsiders.

Examples of Liabilities

Accounts Payable, Salaries Payable, Notes Payable.

Stockholders' Equity

Owners' claim to the business.

Main Components of Stockholders' Equity

Common Stock and Retained Earnings.

Net Income Formula

Net Income = Revenues − Expenses.

Revenues

Money earned from normal business operations.

Examples of Revenues

Sales Revenue, Service Revenue.

Expenses

Costs incurred to generate revenue.

Examples of Expenses

Rent Expense, Salary Expense, Utilities Expense.

Order of Financial Statements

Income Statement → Statement of Retained Earnings → Balance Sheet → Statement of Cash Flows.

Statement of Retained Earnings Formula

Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings.

Current Assets

Assets expected to be used within one year.

Examples of Current Assets

Cash, Inventory, Accounts Receivable.

Long-Term Assets

Assets used longer than one year.

Examples of Long-Term Assets

Land, Buildings, Equipment.

Current Liabilities

Liabilities due within one year.

Examples of Current Liabilities

Accounts Payable, Salaries Payable.

Long-Term Liabilities

Liabilities due after one year.

Examples of Long-Term Liabilities

Bonds Payable, Long-Term Notes Payable.

Operating Activities

Cash flows related to daily business operations.

Examples of Operating Activities

Cash received from customers, paying salaries, paying utilities.

Investing Activities

Cash flows related to buying and selling long-term assets.

Examples of Investing Activities

Purchasing equipment, selling buildings.

Financing Activities

Cash flows related to borrowing money and owner transactions.

Examples of Financing Activities

Issuing stock, paying dividends, borrowing money.

Purpose of Adjusting Entries

To match revenues and expenses correctly using accrual accounting.

Accrued Revenue

Revenue earned but not yet received in cash.

Accrued Revenue Entry

Accounts Receivable Debit, Revenue Credit.

Accrued Expense

Expense incurred but not yet paid.

Accrued Expense Entry

Expense Debit, Payable Credit.

Prepaid Expense Adjustment

Expense Debit, Prepaid Asset Credit.

Unearned Revenue Adjustment

Unearned Revenue Debit, Revenue Credit.

Purpose of Closing Entries

To close temporary accounts at the end of the accounting period.

Temporary Accounts

Revenues, Expenses, Dividends.

Permanent Accounts

Assets, Liabilities, Stockholders' Equity.

Closing Revenue Entry

Revenue Debit, Income Summary Credit.

Closing Expense Entry

Income Summary Debit, Expenses Credit.

Closing Income Summary Entry

Income Summary Debit, Retained Earnings Credit.

Closing Dividends Entry

Retained Earnings Debit, Dividends Credit.

Cash Sale Entry

Cash Debit, Sales Revenue Credit.

Credit Sale Entry

Accounts Receivable Debit, Sales Revenue Credit.

Notes Receivable

A written promise to receive cash in the future.

Interest Formula

Principal × Rate × Time.

Receiving a Note Entry

Notes Receivable Debit, Cash or Accounts Receivable Credit.

Collecting a Note Entry

Cash Debit, Notes Receivable Credit, Interest Revenue Credit.

Allowance for Uncollectibles

Estimated amount of receivables that will not be collected.

Allowance Method Adjusting Entry

Bad Debt Expense Debit, Allowance for Uncollectibles Credit.

Allowance for Uncollectibles Type

Contra asset account.

Effect of Allowance for Uncollectibles

Reduces Accounts Receivable.

FIFO Definition

First-In, First-Out; oldest inventory sold first.

FIFO Effect During Rising Prices

Lower COGS, higher net income, higher ending inventory.

LIFO Definition

Last-In, First-Out; newest inventory sold first.

LIFO Effect During Rising Prices

Higher COGS, lower net income, lower ending inventory.

Average Cost Method

Uses average inventory cost for all units.

Cost of Goods Sold Formula

Beginning Inventory + Purchases − Ending Inventory.

Inventory Turnover Formula

COGS ÷ Average Inventory.

Days in Inventory Formula

365 ÷ Inventory Turnover.

Purpose of Days in Inventory

Measures how long inventory sits before being sold.

Inventory Purchase Entry

Inventory Debit, Accounts Payable Credit.

Inventory Sale Revenue Entry

Cash or Accounts Receivable Debit, Sales Revenue Credit.

Inventory Cost Entry

COGS Debit, Inventory Credit.

Depreciation

Allocation of an asset's cost over its useful life.

Book Value Formula

Cost − Accumulated Depreciation.

Straight-Line Depreciation Formula

(Cost − Residual Value) ÷ Useful Life.

Straight-Line Depreciation Entry

Depreciation Expense Debit, Accumulated Depreciation Credit.

Double-Declining Balance Formula

(2 ÷ Useful Life) × Beginning Book Value.

Double-Declining Balance Characteristic

Accelerated depreciation method with decreasing expense over time.

Units-of-Activity Step 1

(Cost − Residual Value) ÷ Total Estimated Units.

Units-of-Activity Step 2

Rate per unit × Actual Units Used.

Steps for Asset Disposal

Update depreciation, remove asset and accumulated depreciation, compare cash received to book value.

Gain on Disposal

Occurs when cash received is greater than book value.

Loss on Disposal

Occurs when cash received is less than book value.

Payroll Withholdings

FICA taxes and federal/state income taxes withheld from employees.

FICA Taxes

Social Security and Medicare taxes.

Employee Payroll Entry

Salaries Expense Debit, Taxes Payable Credits, Cash Credit.

Employer Payroll Tax Entry

Payroll Tax Expense Debit, FICA Taxes Payable Credit.

Borrowing on a Note Entry

Cash Debit, Notes Payable Credit.

Paying Note and Interest Entry

Notes Payable Debit, Interest Expense Debit, Cash Credit.

Contingent Liability

Potential liability depending on future events.

When to Record Contingent Liabilities

When probable and estimable.

Warranty Liability Entry

Warranty Expense Debit, Warranty Liability Credit.

Current Ratio Formula

Current Assets ÷ Current Liabilities.

Purpose of Current Ratio

Measures ability to pay short-term debts.

High Current Ratio Meaning

Stronger liquidity position.

Issuing Stock Entry

Cash Debit, Common Stock Credit.

Treasury Stock

Company's own stock repurchased from stockholders.

Treasury Stock Effect

Reduces stockholders' equity.

Dividend Declaration Entry

Retained Earnings or Dividends Debit, Dividends Payable Credit.

Dividend Payment Entry

Dividends Payable Debit, Cash Credit.

Net Income Shortcut

Revenues − Expenses.

Book Value Shortcut

Cost − Accumulated Depreciation.

Interest Shortcut

Principal × Rate × Time.

Inventory Turnover Shortcut

COGS ÷ Average Inventory.

Days in Inventory Shortcut

365 ÷ Inventory Turnover.

FIFO Memory Trick

Old inventory leaves first.

LIFO Memory Trick

New inventory leaves first.

Depreciation Memory Trick

Allocation, not valuation.