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.

Key Components

• 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.

Cheat Sheet Tips

• 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.

The Cost Concept

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

Journal Entries and Adjustments

• 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 Calculation

• Net Income Formula: Revenues minus expenses.

  • Revenues arise from sales of products/services.

  • Expenses are costs incurred to generate revenues.

Internal Controls

• 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.

Inventory Valuation Methods

• 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 Concepts

• 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.

Return on Assets (ROA)

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

Exam Preparation

• 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.