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ACC 201 Notes

Introduction to Financial Accounting (University of Hawaii-West Oahu)

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CH 1: Accounting and the Business Environment

● Accountants are bookkeepers, not vice versa
● Accounting is an info system that:
○ Measures business activities
○ Processes the information into reports
○ Communicates the results to decision makers

● Financial Accounting (ACC 201) provides information for External Decision Makers:
○ Investors/shareholders who own a portion of the business
○ Creditors to whom the business owes money
○ Taxing authorities, to whom the business owes taxes
○ Investors & creditors took a smash during the stock crash so that’s why we have
financial accounting
● Managerial Accounting (ACC 202) provides information to Internal Decision Makers:
○ Managers, employees, individuals, businesses

● Types of accountants:
○ CPA’s: Certified Public Accountants
■ Serve the general public
○ CMA’s: Certified Management Accountants
■ Specialize in accounting & financial management knowledge & often work
for a single company
● Accounting positions:
○ Public
○ Private
○ Government
● Governing organizations
○ FASB: Financial Accounting Standards Board
■ Oversees the creation & governance of accounting standards
■ Responsible for creating U.S. accounting standards known as GAAP
○ SEC: Securities & Exchange Commision
■ Oversees U.S. financial markets
■ Gives “permission” to FASB to create rules
○ Accounting standards are called GAAP: Generally Accepted Accounting
Principles
■ Useful accounting info must:
● Be relevant, allowing users to make a decision
● Have faithful representation by being complete, neutral, & free
from error

● GAAP includes:
○ Economic entity assumption
○ Cost principle
■ You record items at the price you got them for

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○ Going concern assumption

■ Where the business can foresee a closure in the future, and by law they
need to let everyone know
○ Monetary unit assumption
■ The assumption that in the long run the dollar is stable and doesnt lose its
purchasing power
■ Dollar, yen, euro
● The Economic Entity Assumption
○ An organization that stands apart as a separate economic unit follows the
economic entity assumption
○ An economic entity can be a:
■ Sole Proprietorship, Partnership, Corporation, LLC
■
○ Corporation: separate legal entity
○ Features of a corporation:
■ Separate legal entity
■ Continuous life & transferability of ownership
● Owners can easily transfer ownership (ex. transfer to children,
etc.)
● They have continuous life, won’t cease to exist
■ No mutual agency
● You can’t just use their money for yourself
■ Limited liability of stockholders (owners of the corporation)
● If bad things happen and the business shuts down, you would only
lose what you’ve invested
■ Separation of ownership & management
● Business members don’t usually own stocks
■ Corporate taxation
■ Government regulation
● Accounting equation: tool used to measure resources and claims to those resources
○ Assets (resources) = liability (claims to resources) + equity (left over)
○ Ex. car (15,000) = 10,000 (borrowed) + 5,000 (your own money)
● Assets:
○ Cash, inventory, supplies, furniture
● Liability: (often ends w/ payable)
○ Bills, account payable, notes payable (with bank, more formal), salaries payable
(work pays you after you do work)
● Equity:
○ Contributed capital (capital that investors contribute to people) & retained
earnings (money kept in the company, earnings that are retained)
● Record transactions using the accounting equation
● Summarize ending balances and make financial statements: (must go in this order)
○ Income statement
■ Revenues - expenses = NI (Net Income)

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○ Statement of retained earnings

■ beginning balance of retained earning
■ + NI or - net loss (if there is one)
■ - dividends
■ = ending balance of retained earnings
○ Balance sheet
■ Assets = liabilities + stockholders equity
○ Statement of cash flows (not learning now)

CH 2: Recording Business Transactions

● An account is the detailed record of all increases and decreases that have occurred in
an account during a specified period
● Prepaid expense is an asset
○ Ex. paying for car insurance in advance that would kick in once you get into an
accident

● Assets Accounts:
○ Cash
○ Accounts receivable
○ Notes receivable
○ Prepaid expense
○ Land
○ Building
○ Equipment, furniture, & fixtures
● Liabilities Accounts
○ Accounts payable
■
○ Notes payable
■ A written promise saying that
○ Accrued liability
■ Work done, but not paid yet
■ Ex. worked but didn’t get paycheck yet
○ Unearned revenue
■ Payment in advance, no work done yet
■ Ex. a lawyer is paid before a will is written
● Equity Accounts
○ Common stock (contributed capital)
■
○ Retained earnings
○ Dividends
■ Contra (oppo) to equity

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■ When a dividend is paid, the over all equity shrinks

○ Revenues
■ Service revenue
■ Interest revenue
○ Expenses
■ Utility expense, rent expense, supplies expense, salaries expense,
advertising expense
■ Cost of supplies & labor for making a product
■ Ex. to make a t-shirt, you have to buy the shirt, screen, & dye, and labor
● Chart of accounts: a list used to organize a company’s accounts
○ Different numbers are used for certain groups (1 for assets, 2 for liabilities, etc.)
● Ledger: a record holding all of the accounts of a business, the changes in those
accounts, and their balances.

● Double entry bookkeeping

○ Transactions always involve at least two accounts
○ Accounting uses the double-entry system to record the dual effects of each
transaction
■ Ex. office supplies are purchased for cash requiring an increase in office
supplies and a decrease in cash
● The T-Account
○ A shortened form of the ledger is called the T-Account
■ The left side of the T-account is the debit
■ The right side is the credit
■ Both sides can increase or decrease depending on the type of the
account
■ Image on slide 2-12
○ Asset accounts increase debit, decrease credit to show increase in the account
■ Assets increase with a debit
○ Liabilities & Equity accounts decrease debit, increase credit
■ Liabilities & Equity increase with a credit
○ Expenses and dividends are contra equities and they would be the oppo of
regular equity
○ If the transaction is in one category (ex. assets) then both a decrease and an
increase will happen in the same category
○ Image on slide 2-13
○ Equity is a measurement of wealth, assets are actual things that are invested in
that we control
● The accounting equation is expanded to include the rules of debits & credits for the
elements of equity
● Equity is subdivided into contributes capital & retained earnings
○ They get further divided,

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○ Contributes capital has +common stock

■ Increase on credit
○ Retained earnings have -dividends (inc. debit), +revenues (inc. credit), -expenses
(inc. debit)
■ Increase on credit for retained earnings
● The normal balance of an account
○ The side that the account increases on where the balance is found (kind of total)
○ Assets increase on debit side, so the normal balance is debit
● Accountants use source documents to record transactions
○ Transactions are recorded in a journal, the record of the transactions in date
order
○ The data from the journal is then transferred to the ledger, a process called
posting
● The journalizing and posting process has five steps:
○ 1) identify the accounts & the account types (asset, liability, equity)
○ 2) decide whether each account increases or decreases, then apply the rules of
debits & credits
○ 3) record transaction in journal w/ a brief explanation of what was done
○ 4) post the journal entry to the ledger
○ 5) determine whether the accounting equation is in balance

● Practice

Account: Type (A,L,E,) +: Norm bal

Service rev Equity cr cr

Dividends Equity dr dr
Utility ex. Equity dr dr
Prepaid rent Asset dr dr
Unearned rev. Liability cr cr
Advertising ex. Equity dr dr
Office supplies Asset dr dr
Common stock Equity cr cr
Accounts pay Liability cr cr
Interest rev. Equity cr cr

● Back to slides on journalizing & posting

● Slide 2-30
○ On account = not cash
● Slide 2-33
○ Multiple debits/credits entry is a “compound journal entry”

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● Slide 2-42
○ Accrued: received the bill but they will pay it later
● Slide 2-52
○ This is what it looks like on the computer

● Trial balance: a list of all ledger accounts w/ their balances at a point in time
○ Asset accounts first, then liabilities, and then equities
○ Slide 2-55

CH 3: The Adjusting Process

● Cash basis accounting
○ Revenues are recorded when cash is received
○ Expenses are recorded when cash is paid
○ GAAP does not allow
● Accrual basis accounting
○ Revenues are recorded when earned
○ Expenses are recorded when incurred
○ Used by most businesses
○ Provides a better picture of a businesses revenues and expenses
● Time Period Concept assumes business activities are sliced into small time segments
and that financial statements can be prepared for specific periods (ex. a month, quarter,
or year) and can still be useful information
● A fiscal year is an accounting year of any 12 consecutive months that may or may not
coincide w/ the calendar year.
● Revenue recognition principle
○ It tells accountants when to record revenue and requires companies follow a five
step process
■ 1) identify the contract with the customer
● Contract (agreement between 2 or more parties that creates
enforceable rights and obligations)
■ 2) identify the performance obligations in the contract
● Performance obligation (a contractual promise w/ a customer to
transfer a distinct good or service)
● Ex. building a pool. 1st landscape, 2nd dig a hole, etc.
■ 3) determine the transaction price
■ 4) allocate the transaction price to the performance obligations in the
contract
■ 5) recognize revenue when the entity satisfies each performance
obligation
● Matching principle

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○ Guides accounting for expenses and ensures:

■ All expenses are recorded when they are incurred during the period
■ Expenses are matched against the revenues of the period
● Unadjusted trial balance lists the revenues and expenses, but these amounts are
incomplete because they omit various revenue and expense transactions.
● Adjusting entries are made at the end of the accounting period to record revenues to the
period in which they occur

● Types of Adjusting Entries

○ 1) Deferred expenses
■ Types of:
● Prepaid Rent
● Office Supplies
● Depreciation
○ Property, plant, and equipment represent long-lived,
tangible assets used in the operation of the business
○ 2) Deferred revenue
■ When a company receives cash before the work is done, or a product is
delivered.
■ It’s a liability
■ When the delivery is made/work is done, revenue is then converted to
earned revenue.
○ 3) Accrued Expenses
■ Expenses a business has incurred but not yet paid.
■ Examples of accrued expenses:
● Salaries expense
● Interest expense
● Utilities expense
○ 4) Accrued revenues
■ Arise when a company performs a service or delivers a product but has
not yet collected cash.
■ Record accrued revenues w/
● Debit to Accounts Receivable
● Credit to Service Revenue
(Done in notebook)^

● Never credit or debit cash in adjusting entries

● Worksheet: an internal document that helps summarize data for the preparation of the
financial statements

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CH 4: Completing the Accounting Cycle

● Accounting cycle
○ 1) Analyze Transaction
○ 2) Journalizing Transaction
○ 3) Post j.e.’s to individual accounts (T accounts) in the ledger
○ 4) Unadjusted Trial Balance (dr=cr)
○ 5) Prepare adjusting j.e.’s * journalizing
○ 6) Post je.e’s to individual accounts
○ 7) Prepare Adjusted Trial Balance
○ 8) Prepare Financial Statements
○ 9) Prepare Closing Entries

● Real accounts vs temporary accounts

○ Real accounts stay open at the end of the period, temporaries are closed
○ Revenues and expenses are accounts that get closed

● Steps to close an account:

○ 1) Close Revenues: to income summary
■ Debit revenue
● Credit income summary (temporary bc it doesn’t make it to the
balance sheet)
○ 2) Close Expenses: to income summary
■ Debit income summary
● Credit expenses
○ 3) Close Income Summary: to retained earnings
■ Debit income summary
● Credit retained earnings
○ 4) Close Dividends: to retained earnings
■ Debit retained earnings
● Credit dividends

Review for Midterm 1:

● There is no mix of asset and expenses, ex. prepaid advertising expense
○ Must be prepaid advertising or advertising expense
● 1-4 was service revenue, ch 5 starts sales revenue
CH 5: Merchandising Operations
● Merchandise inventory/inventory: Current Asset. what the store buys from wholesaler,
put it in their store for more, making profit.
● Purchases: when the store buys inventory from wholesaler
● Sales: when the store sells to a customer
● The operating cycle of a merchandising business (circles back)

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○ Purchase inventory (cash, credit)

○ Sell inventory (cash, account receivable)
○ a/r → cash ----> purchase more inventory
● Cost of goods sold: where cost of merchandise sold go

● 2 types of Inventory Accounting Systems

○ Periodic (Inventory) System
■ Need to physically count inventory to determine amount on hand.
■ Often used w/ lots of low dollar per unit inventory (ex. Hardware store)
● Low dollar value per unit, high quantity
○ Perpetual (Inventory) System: (most popular)
■ Running a computerized system for inventory on hand
“perpetually/constantly” updated.
■ Often used w/ smaller quantities but larger dollar amount per unit.
Require physical count @ EOY (end of year).
● High dollar value per unit, low quantity.
● Allowances: an amount granted t ___ goods are not “as ordered”
● FOB shipping point:
● FOB destination:

Service industry
● Service revenue
● Accounting uses perpetual system
Retail industry
● Sales revenue “sales”
● Accounting uses perpetual system

● Wholesaler → merchandiser (retailer) → customers

● Found on income statement
○ Service revenue → sales revenue (COGS) ← inventory
○ Sales revenue - COGS = gross profit
● Found on balance sheet
○ Merchandise inventory: asset
● Estimated returns inventory: asset
● Sales revenue:
● Sales discount forfeited:
● Cost of goods sold:
● Delivery expense:

Close accts.
● New accts in steps 1 & 2 of closing
Income statement:
● Is a Multi-Step Income Statement
○ Revenues-cogs

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○ Expenses are separated into selling & administration

100-90=A 16% got 10% usual

89-80=B

Oct 9: mini quiz j.e.’s (practice)

Can earn max of 5 pts (personally) given 100% is received on practice quiz: max total of 95

CH 6: Merchandising Inventory
Do not need to read appendix for chap 6*

● Consistency Principle: use same methods from period to period (perpetual system used
every year, or periodic system)
○ Businesses should use the same accounting methods from period to period.
● Disclosure Principle: report enough information to help with good decision making
○ Information is relevant & faithful representation
○ Requires that a company report enough information for outsiders to make
knowledgeable.
● Materiality Concept: states that we have a strict application of GAAP on significant items
○ Principle that states significant items must conform to GAAP.
● Conservatism Principle: no gains, provide for probable losses
○ In doubt: record asset @ lowest reasonable amount
○ In doubt: record liability @ highest reasonable amount
○ In doubt: expense an item rather than capitalize it (make it an asset)
○ Principle whose foundation is to exercise caution in reporting financial statement
items.
● Maintaining good control over inventory: (perpetual method)
○ 1) Specific Identification
■ Coding (barcodes) goods, specifically what it cost us (20,21,24,etc.), to
keep track of goods sold
■ Seen in businesses that have small inventory and high dollar amount
■ Identifies exactly which inventory item was sold. Usually used for higher
cost inventory.
○ 2) FIFO (First-In First Out)
■ Track of costs kept in bookkeeping, not kept in physical (barcodes), one
good gets sold 1st time and 1st price gets used
■ Pools used, grab one and another
■ Push old items to the front, new items put into the back (canned
tomatoes, milk)
■ Treats the oldest inventory purchases as the first units sold.
○ 3) LIFO (Last-In First Out)
■ Old items last, new items first
■ (clothes, phones)

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■ Treats the most recent/newest purchases as the first units sold.

○ 4) Weighted Average
■ Average done every time a new purchase is made
■ Calculates a weighted-average for sale and the number of units available.

Hw Gross profit for Toys Galore using FIFO:

Using LIFO:
Sales rev: 484
COGS: 268
GP:216

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