Accounting I Concepts Overview

Chapter 1:
Basic Accounting Equation

Financial Statements

1. Income Statement reports revenues and expenses. It is made for a specific

accounting period.
Income Statement Company X Date

Service Revenue

(less) Expenses

Net Income

2. Retained Earnings Statement reports details about stockholders’ equity.

Retained Earnings Statement Company X Date

Retained Earnings last month

(add) Net Income

(less) Dividends

Retained Earnings this month

 3. Balance Sheet reports assets, liabilities, and stockholders’ equity. Checks if the basic
accounting equation is in order (Total Assets= Total Liabilities + Total Equity).
It is made at a specific date (at the beginning or at the end of a period).

Balance Sheet Company X Date Liabilities

Assets Notes Payable

Accounts Payable
Cash
Interest Payable
Accounts Receivable
Salaries and Wages Payable
Supplies
Unearned Service Revenue
Equipment
Prepaid Expenses
Stockholders’ Equity
(less) Accumulated Depreciation
Common Stock
Total Assets Retained Earnings
(Revenue- Expenses-Dividends)

Total Liabilities and Equity

Chapter 2:
The Recording Process

ADE (Assets, Dividends & Expenses) = Debit Normal Accounts

Liabilities, Common Stock & Service Revenue = Credit Normal Accounts

Debit Normal Accounts Credit Normal Accounts

Journaling transactions
General Journal J1
 Date Account Titles and Ref. Debit (Dr.+) Credit (Cr.-)
Explanations
Date of Accounts involved in See The Accounting equation must
transaction the transaction and below be in balance after every
explanation if needed the transaction. For every Debit
Chart of there must be a Credit.
Accounts

Posting the Journal Entries

T-Accounts vs. Ledger Accounts

Account name Ref. no

Date Explanation Ref. Debit Credit Balance
- J1 Balance is
calculated
step by step.

Total Balance is calculated

at the end.
Trial Balance

 Take the final balances from the T-Accounts/Ledger Accounts for each account.
 NOT a Financial Statement.
 List the accounts in order of Assets, Liabilities and Equity.

Trial Balance Company X Date

Debit Credit .

Assets accounts

Liabilities accounts

Equity accounts

Balances Debit balance = Credit balance

Chapter 3:
Adjustments: made at the end of the period.
Under the accrual basis of accounting, companies record transactions that change a company's
financial statements in the periods in which the events occur, not when the cash is received/paid.
Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).

Types of Adjustments

Deferrals: Paid (or received) cash before expense (or revenue) recognized.

1. Prepaid expenses: Expenses paid in cash before they are used or consumed.

XXXXX Expense DT
Prepaid XXXXX Expense CR

2. Unearned revenues: Cash received before services are performed.

Unearned Revenue DT
Service Revenue CR

*Depreciation: is the process of allocating the cost of an asset to expense over its useful life.

Depreciation Expense DT
Accumulated Depreciation CR

Accumulated Depreciation is called a contra asset account. Such an account is offset against an
asset account on the balance sheet.
Accruals: Paid (or received) cash after expense (or revenue) recognized

1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.

Account Receivable DT
Service Revenue CR

2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

XXXXX Expense DT
XXXXX Payable CR

 After recording all the adjustments, they can be added to the T-Accounts/Ledger Accounts and
then an adjusted trial balance can be done.
 If there is data from the previous accounting period, add it as well. And then prepare the financial
statements with all the information.

Chapter 4:
The Classified Balance Sheet
To improve understanding, companies group similar assets and similar liabilities together in the
balance sheet as follows:

Assets Liabilities and Stockholders’ Equity

Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Stockholders’ equity
Intangible assets