Recording-2025-03-17T22:02:12.596Z

Basic Accounting Concepts

Financial Accounting Equation: Understand that assets equal liabilities plus owner's equity. This fundamental equation is central to all accounting operations.

Assets: Resources owned by a company, such as cash, inventory, supplies, prepaid expenses, etc.
- Example items include cash, accounts receivable, inventories of products, and pre-paid insurance.
- Students may confuse salaries with assets; understand salaries are a liability until paid.
Liabilities: Obligations the company has to others, including debts, bank loans, and payables.
- A simple rule: if it says "payable" (e.g., accounts payable), it's a liability.
Owner's Equity: The owner's stake in the company consisting of investments (like common stock) and retained earnings.
- Represents the residual claims of the owners after liabilities are settled.

Recommended to prepare a note card summarizing:
- Definitions and examples of assets, liabilities, and owner’s equity.
- Remember that salaries are not assets; they are obligations until paid.

Cost Concept Definition: This is the amount of payment used to acquire a good or service, like the cost of the warehouse or equipment.

Understand how to maintain the general ledger with correct journal entries at the end of each accounting period. Adjust entries for any changes during the period to maintain accurate records.
Debits and Credits:
- Assets increase with debits; liabilities and owner’s equity increase with credits.
- It’s crucial to memorize these principles for clarity on accounting entries.

Net Income Formula: Revenues minus expenses.
- Revenues arise from sales of products/services.
- Expenses are costs incurred to generate revenues.

Preventative Internal Controls: Measures to prevent errors or fraud, such as separation of duties and physical controls.
Detective Internal Controls: Measures to identify issues, like audits and bank reconciliations.

FIFO (First In, First Out): The oldest inventory items are sold first. Generally results in higher asset valuations during inflation.
LIFO (Last In, First Out): The most recently acquired items are sold first. Tends to lower asset valuations during inflation.

Depreciation: The reduction in value of an asset over time. Key methods include:
- Straight-Line Method: Equal depreciation expense is allocated over the asset’s useful life.
- Double Declining Balance Method: Faster depreciation in the early years, changing rates of depreciation based on asset's book value.
Formula for Straight-Line Depreciation: (Cost - Residual Value) / Useful Life.
- Knowing how straight-line vs. declining methods affect total assets is crucial.

ROA Formula: Net Income divided by average total assets. This metric reflects how efficiently a company is utilizing its assets to generate profit.

You are likely to encounter written questions that require understanding calculations of shareholders' equity and retained earnings.
- For retained earnings, the formula incorporates dividends and net income: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.