ACC 111 / ACC 3112: Quick Reference Notes

Module 1: Analyzing and Recording Business Transactions

• Core concepts

  • Accounting equation: ext{Assets} = ext{Liabilities} + ext{Equity}

  • Equity = Owner’s capital + Revenues − Expenses − Withdrawals (for a sole proprietorship)

  • Debits and credits: left side = debit (Dr), right side = credit (Cr)

  • Normal balances: Assets (Dr), Liabilities (Cr), Equity/Owner’s Capital (Cr), Revenues (Cr), Expenses (Dr), Withdrawals (Dr)

  • Double-entry principle: every transaction affects at least two accounts; total debits = total credits; the accounting equation remains in balance

• The Accounts, Journal, Ledger, Trial Balance

  • Account: detailed record of changes in a single element (asset, liability, or equity)

  • Journal: chronological record of transactions; includes date, accounts debited/credited, amounts, and explanation

  • Ledger: collection of all accounts with their balances

  • Trial balance: list of all accounts with debit/credit balances; total debits = total credits

• The Accounting Cycle (overview)

  • Steps: analyze transactions → journalize → post to ledger → prepare trial balance → adjust entries → adjusted trial balance/worksheet → financial statements → closing entries → post-closing trial balance (optional reversing entries)

• Key financial statements (order for preparation)

  • Income Statement (revenues and expenses → net income)

  • Statement of Owner’s Equity (beginning capital, investments, net income, withdrawals, ending capital)

  • Balance Sheet (assets, liabilities, equity at a point in time)

  • Statement of Cash Flows (operating, investing, financing activities; not the focus here but introduced later)

• Quick formulas and notes

  • Net Income = ext{Revenues} - ext{Expenses}

  • Expanded equation for a sole proprietorship: ext{Assets} = ext{Liabilities} + ext{Owner’s Capital} + ext{Revenues} - ext{Expenses} - ext{Withdrawals}

  • Journal/Posting checks: ensure the posting links journal entries to ledger accounts (dates, amounts, and balance)

Module 2: The Adjusting Process

• Why adjustments are needed

  • Accrual basis accounting recognizes revenues when earned and expenses when incurred

  • Time period concept: statements cover specific periods; adjustments ensure accrual basis reporting

• Adjusting categories (deferrals vs accruals)

  • Prepaid expenses (deferrals): assets now; expense later (e.g., Prepaid Insurance, Supplies, Depreciation)

  • Unearned revenues (deferrals): liability now; revenue later

  • Accrued expenses: expenses incurred but not yet paid (e.g., Salaries Payable, Interest Payable)

  • Accrued revenues: revenues earned but not yet collected or billed (e.g., Accounts Receivable → Revenue)

  • Depreciation: allocation of long-term asset cost over its useful life; contra-asset account: Accumulated Depreciation

• Adjusting entries (3-step approach)

  • Step 1: Determine current balances

  • Step 2: Determine correct balances after adjustments

  • Step 3: Record adjusting entries to move from Step 1 to Step 2

• Examples (conceptual)

  • Prepaid Insurance: monthly expense = rac{ ext{Prepaid Insurance}}{ ext{months covered}}

  • Supplies: count on hand; determine used amount; adjust Supplies Expense and Supplies

  • Depreciation (straight-line): ext{Depreciation per month} = rac{ ext{Cost} - ext{Salvage}}{ ext{Useful life (months)}}

  • Example: cost 26{,}000, salvage 8{,}000, life 48 months → monthly depreciation rac{26{,}000-8{,}000}{48} = 375

  • Unearned Revenue: recognize revenue as earned; Debit Unearned Revenue, Credit Revenue

  • Accrued Salaries: Debit Salaries Expense, Credit Salaries Payable

  • Accrued Revenues: Debit Accounts Receivable, Credit Revenue

• Worksheet as a planning tool

  • Steps: (1) list accounts and unadjusted trial balance, (2) enter adjustments, (3) prepare adjusted trial balance, (4) sort to financial statements, (5) total to derive income or loss

• Impact on statements

  • Adjusted figures feed into Income Statement (revenues/expenses) and Balance Sheet (assets/liabilities/equity)

Module 3: Completing the Accounting Cycle

• From adjusted trial balance to financial statements

  • Step 1: Prepare Income Statement (revenues and expenses; net income)

  • Step 2: Prepare Statement of Owner’s Equity (beginning capital + investments + net income − withdrawals = ending capital)

  • Step 3: Prepare Balance Sheet (assets = liabilities + equity) using ending capital from Step 2

  • Step 4: Optionally prepare Statement of Cash Flows (not the focus here)

• Closing the books (temporary vs permanent accounts)

  • Temporary accounts: Revenues, Expenses, Withdrawals (reset to zero each period via closing entries)

  • Permanent accounts: Assets, Liabilities, Equity (carry balances to next period)

  • Income Summary: close revenues and expenses to this temporary account; then close Income Summary to Owner’s Capital; finally close Withdrawals to Owner’s Capital

• Reversing entries (optional)

  • Purpose: simplify next period’s entries for accrued items (e.g., salaries payable)

  • Reversing entry is the exact opposite of the adjusting entry done previously

• Preparing financial statements from the worksheet

  • Use amounts from the Income Statement and Balance Sheet columns of the worksheet

  • Net income from the Income Statement flows into the Balance Sheet via the Equity section (Ending Capital)

• Presentation formats

  • Balance Sheet: account form (Assets left, Liabilities & Equity right) or report form (assets, then liabilities, then equity)

• Key takeaways

  • All four statements (and notes) summarize the effect of the period’s transactions after adjustments

  • The closing process resets temporary accounts to zero for the next period

Module 4: Accounting for Merchandising Operations

• Merchandising basics

  • Merchandisers buy and sell goods; common terms: Sales, Cost of Goods Sold (COGS), Gross Profit = Net Sales − COGS

  • Operating cycle: cash → inventory → sale on credit → accounts receivable → cash

• Inventory systems

  • Perpetual system: continuous updates of Inventory and COGS; detailed tracking with barcodes; requires physical counts annually

  • Periodic system: updates Inventory only at period end; uses Purchases account during period; COGS computed at period end

  • Both systems may be used in a hybrid approach

• Key inventory relationships (per perpetual system)

  • Beginning Inventory (BI) + Net Purchases (NP) = Merchandise Available for Sale (MAS)

  • MAS = Ending Inventory (EI) + COGS

  • COGS = MAS − EI

• Inventory terminology and flows

  • Freight-in, Transportation-in: included in cost of merchandise

  • FOB shipping point vs FOB destination: who pays shipping and when ownership transfers

• Sales and related entries

  • Sales, Sales Discounts, Sales Returns and Allowances, and COGS are used for merchandising transactions

• Financial statement formats for merchandisers

  • Multi-step vs Single-step income statements

  • Classified balance sheet (current vs noncurrent assets/liabilities)

• Closing for merchandising operations

  • Merchandising introduces temporary accounts: Sales, Sales Discounts, Sales Returns and Allowances, COGS

  • Depending on inventory system (perpetual vs periodic), the closing entries differ slightly in how COGS and Inventory are treated

• Summary of the merchandising framework

  • Inventory management is central; accurate COGS drives gross profit and net income

  • The perpetual system gives real-time inventory data; periodic relies on year-end counts and calculations

Core formulas and concepts to remember

• Accounting equation and balance: ext{Assets} = ext{Liabilities} + ext{Equity}

• Net income: ext{Net Income} = ext{Revenues} - ext{Expenses}

• Depreciation (straight-line): ext{Depreciation per month} = rac{ ext{Cost} - ext{Salvage}}{ ext{Useful life (months)}}

• Prepaid expenses and depreciation adjustments: adjust assets downward and recognize expense

• Unearned revenues: recognize revenue as earned; reduce the liability

• Accrued expenses and revenues: recognize the expense and liability, or revenue and asset, as applicable

• Inventory math (per MAS framework): ext{BI} + ext{NP} = ext{MAS} = ext{EI} + ext{COGS}

• Cash vs accrual basis distinctions:

  • Accrual: revenues when earned, expenses when incurred (adjustments required)

  • Cash: revenues when cash received, expenses when cash paid; supports the cash flow statement

• Reversing entries (optional): simplify subsequent period’s accruals by reversing certain adjusting entries at the start of the new period

• Examples mentioned in the guide (conceptual references)

  • Straight-line depreciation example: rac{26{,}000 - 8{,}000}{48} = 375 per month

  • Insurance adjustment: monthly expense from prepaid insurance: rac{2{,}400}{24} = 100 per month

  • Accrued salaries: record expense and liability for days worked but not yet paid

  • Unearned revenue adjustment: record portion earned as revenue and reduce unearned revenue

  • Accrued revenues: record revenue and asset (receivable) for earned-but-not-yet-billed work

Note: These are concise, essential points intended for rapid recall. For exam preparation, revisit each module’s examples and problem types (journalizing, posting, adjusting, and closing) to reinforce the mechanics behind these concepts.