Financial Accounting

Accounting Fundamentals

Who Uses Accounting Data?

  • Various stakeholders utilize accounting information for decision-making.

Basic Accounting Activities

  • Identification: Recognizing economic events relevant to the business.

  • Recording: Maintaining a systematic, chronological diary of events measured in monetary values.

  • Communication: Conveying financial information through financial statements.

Basic Accounting Equation

  • The fundamental equation: Assets = Liabilities + Stockholders’ Equity.

Stockholders' Equity

  • Represents the ownership claim on a corporation’s total assets:

    • Formula: Stockholders’ Equity = Total Assets - Total Liabilities

    • It is the residual interest in the assets of the entity after deducting liabilities.

Transactions Example Analysis

Transaction Types and Accounting Equations

  1. Investment of Cash by Stockholders:

    • Ex: On October 1, 2019, investing 15,000 cash in exchange for common stock.

  2. Purchase of Equipment for Cash:

    • Ex: Purchasing computer equipment for 7,000 zloty in cash.

  3. Purchase of Supplies on Credit:

    • Ex: Purchasing supplies for 1,600 on credit.

  4. Services Performed for Cash:

    • Ex: Earning 1,200 cash from services.

  5. Payment of Advertising on Credit:

    • Ex: Receiving a bill for advertising of 250 on credit.

T-Accounts and Double-Entry Accounting

Introduction to T-Accounts

  • T-Account Structure: Each account consists of two sides:

    • Debit (Left)

    • Credit (Right)

Recording Debits and Credits

  • Debits:

    • Increase assets and expenses.

    • Decrease liabilities and equity.

  • Credits:

    • Increase liabilities and equity.

    • Decrease assets and expenses.

Recording in T-Accounts Example:

  • Cash Account Transactions:

    • Investing cash, buying equipment, receiving cash for services, etc.

  • Normal Balances:

    • Assets: Debit for increase

    • Liabilities: Credit for increase

The Journal and Ledger

The Journal

  • Used for the initial recording of transactions in chronological order.

  • Includes debit and credit amounts for each transaction.

The Ledger

  • The complete record of all accounts.

  • Accounts are classified into assets, liabilities, stockholders’ equity, revenues, and expenses.

Posting from the Journal to the Ledger

  • Posting Procedure: Transfer journal entries to respective accounts in the ledger.

  • Chart of Accounts: Lists accounts used by a company, starting with balance sheet accounts.

Summary of Transactions

  • Transactions should always maintain the equality of the accounting equation.

  • Changes in the equity section must be traced through common stock and retained earnings.

Review Tests

  • Practice identifying accounting processes, users of financial information, and differences in accounting terminology.