ACC 101


PART 1 — THE ABSOLUTE BASICS

THE 5 TYPES OF ACCOUNTS

These are the foundation of the entire class.



1. ASSET

Simple definition: Something the company owns or controls that will provide a future benefit.

Real-world example: A business has $10,000 in its bank account. The $10,000 is an asset.

Examples:

  • Cash

  • Accounts Receivable

  • Inventory

  • Supplies

  • Prepaid Expenses

  • Equipment

  • Buildings

  • Land

  • Investments

Normal balance: DEBIT



2. LIABILITY

Simple definition: Money or something else the company owes to another person or company.

Real-world example: A company borrows $50,000 from a bank. The $50,000 loan is a liability.

Examples:

  • Accounts Payable

  • Notes Payable

  • Salaries Payable

  • Interest Payable

  • Taxes Payable

  • Unearned Revenue

  • Bonds Payable

Normal balance: CREDIT



3. STOCKHOLDERS' EQUITY

Simple definition: The owners' claim on the company's assets after liabilities are taken away.

Real-world example: A company has $100,000 of assets and $40,000 of liabilities. The owners' equity is $60,000.

Formula:

Assets − Liabilities = Stockholders' Equity

Normal balance: CREDIT



4. REVENUE

Simple definition: Money earned by providing goods or services to customers.

Real-world example: A landscaping company completes a $1,000 job for a customer. The $1,000 is revenue.

Normal balance: CREDIT



5. EXPENSE

Simple definition: A cost the company incurs to operate the business and earn revenue.

Real-world example: A company pays $2,000 for employee wages. Wages are an expense.

Normal balance: DEBIT



THE ACCOUNTING EQUATION

Assets = Liabilities + Stockholders' Equity

Simple definition: The basic rule that says what a company owns must equal what it owes plus the owners' claim.

Real-world example:

A company has:

Assets = $100,000
Liabilities = $40,000
Equity = $60,000

$100,000 = $40,000 + $60,000



DEBITS AND CREDITS

Debit

Simple definition: The left side of an account.

Real-world example: When a company receives $5,000 cash, Cash is debited.



Credit

Simple definition: The right side of an account.

Real-world example: When a company borrows $5,000, Notes Payable is credited.



WHAT INCREASES WITH A DEBIT?

D-E-A-D

Dividends
Expenses
Assets

Real-world example: Buying equipment for cash increases Equipment, so Equipment is debited.



WHAT INCREASES WITH A CREDIT?

L-E-R

Liabilities
Equity
Revenue

Real-world example: A company earns $1,000 of service revenue. Revenue is credited.



MASTER DEBIT/CREDIT TABLE

Account

Increase

Decrease

Assets

Debit

Credit

Liabilities

Credit

Debit

Common Stock

Credit

Debit

Retained Earnings

Credit

Debit

Revenue

Credit

Debit

Expenses

Debit

Credit

Dividends

Debit

Credit

MEMORIZE THIS TABLE.



CHAPTER 1 — A FRAMEWORK FOR FINANCIAL ACCOUNTING

The textbook identifies Chapter 1 as "A Framework for Financial Accounting."



ACCOUNTING

Simple definition: The process of recording, measuring, and communicating financial information.

Real-world example: Walmart records its sales, expenses, assets, and debts so people can understand the company's financial condition.



FINANCIAL ACCOUNTING

Simple definition: Accounting information prepared mainly for people outside the company.

Real-world example: Investors use Apple's financial statements to decide whether to buy Apple's stock.



EXTERNAL USERS

Simple definition: People outside the company who use accounting information.

Examples:

  • Investors

  • Creditors

  • Banks

  • Government agencies

  • Suppliers

Real-world example: A bank reviews a company's financial statements before approving a loan.



INTERNAL USERS

Simple definition: People inside the company who use accounting information to make decisions.

Examples:

  • Managers

  • Executives

  • Department heads

Real-world example: A manager looks at expenses to decide whether the company needs to reduce spending.



INVESTOR

Simple definition: A person or organization that puts money into a company hoping to earn a return.

Real-world example: Someone buys shares of Coca-Cola because they expect the investment to increase in value.



CREDITOR

Simple definition: A person or organization that lends money or provides goods/services that will be paid for later.

Real-world example: A bank lending a company $100,000 is a creditor.



ACCOUNTING INFORMATION

Simple definition: Financial information used to make business decisions.

Real-world example: A company's revenue and profit help an investor decide whether to buy its stock.



BUSINESS TRANSACTION

Simple definition: An event that changes a company's financial position and can be measured in money.

Real-world example: A company purchases a $5,000 computer.



GAAP

Simple definition: Generally Accepted Accounting Principles; the main accounting rules used in the United States.

Real-world example: A public company follows GAAP when preparing its financial statements.



FASB

Simple definition: Financial Accounting Standards Board; the organization that establishes U.S. accounting standards.

Real-world example: FASB establishes accounting guidance companies use when preparing financial statements.



AUDITOR

Simple definition: A professional who examines financial information to determine whether financial statements are fairly presented.

Real-world example: An outside accounting firm audits a company's annual financial statements.



QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

These explain what makes financial information useful.



RELEVANCE

Simple definition: Information that can help someone make a decision.

Real-world example: Knowing a company is losing money is relevant to someone deciding whether to invest.



PREDICTIVE VALUE

Simple definition: Information that helps predict what may happen in the future.

Real-world example: A company's growing sales may help an investor predict future performance.



CONFIRMATORY VALUE

Simple definition: Information that helps confirm or change an earlier expectation.

Real-world example: An investor expected profits to rise; the company's financial statements show that profits did rise.



FAITHFUL REPRESENTATION

Simple definition: Information accurately represents what actually happened.

Real-world example: If a company owes $50,000, the financial statements should accurately report the liability.



COMPLETE

Simple definition: Important information is not left out.

Real-world example: A company reports all significant debts instead of hiding one.



NEUTRAL

Simple definition: Information is presented without trying to influence people toward a particular decision.

Real-world example: A company should not intentionally make its financial results look better than they really are.



FREE FROM ERROR

Simple definition: Information is recorded and presented correctly.

Real-world example: A company correctly records a $5,000 purchase instead of accidentally recording $50,000.



COMPARABILITY

Simple definition: Users can compare information between companies or periods.

Real-world example: An investor compares Coca-Cola's profit this year with its profit last year.



VERIFIABILITY

Simple definition: Different knowledgeable people can check the information and reach similar conclusions.

Real-world example: An auditor can examine invoices and confirm the amount reported.



TIMELINESS

Simple definition: Information is available soon enough to be useful.

Real-world example: Investors receive a company's quarterly financial results before making investment decisions.



UNDERSTANDABILITY

Simple definition: Information is presented clearly enough for knowledgeable users to understand.

Real-world example: A financial statement clearly labels revenue, expenses, assets, and liabilities.



THE FOUR MAIN FINANCIAL STATEMENTS



INCOME STATEMENT

Simple definition: Shows revenues, expenses, and profit or loss over a period of time.

Real-world example: A company reports its revenue and expenses for the year ending December 31.

Formula:

Revenue − Expenses = Net Income



NET INCOME

Simple definition: Profit remaining after expenses are subtracted from revenue.

Real-world example:

Revenue = $100,000
Expenses = $70,000

Net income = $30,000



NET LOSS

Simple definition: When expenses are greater than revenue.

Real-world example:

Revenue = $50,000
Expenses = $65,000

Net loss = $15,000



STATEMENT OF STOCKHOLDERS' EQUITY

Simple definition: Shows how owners' equity changed during a period.

Real-world example: It shows changes from stock issued, net income, and dividends.



BALANCE SHEET

Simple definition: Shows assets, liabilities, and equity at a specific date.

Real-world example: A company prepares a balance sheet showing what it owns and owes on December 31.



STATEMENT OF CASH FLOWS

Simple definition: Shows where cash came from and where cash went.

Real-world example: It shows cash received from customers and cash spent on equipment.



CURRENT VS. LONG-TERM

CURRENT ASSET

Simple definition: An asset expected to be used, sold, or converted into cash within one year.

Real-world example: Cash and accounts receivable.



LONG-TERM ASSET

Simple definition: An asset expected to provide benefits for more than one year.

Real-world example: A building used for 20 years.



CURRENT LIABILITY

Simple definition: A debt normally due within one year.

Real-world example: A $5,000 bill owed to a supplier next month.



LONG-TERM LIABILITY

Simple definition: A debt normally due more than one year from now.

Real-world example: A 10-year business loan.