ACCOUNTING IMPORTANT NOTES:

Chapters 2-3:
1. Accounting equation
a. NCA + CA (ASSETS) = NCL +CL (LIABILITIES) + STOCKHOLDERS’ EQUITY
b. Stockholders’ Equity = common stock + retained earnings
c. Retained earnings= revenue + other income – expenses – dividends
2. Posting (journal and ledger)
a. Prepaid rent: not accounts payable
b. Deferred revenue: not accounts payable
c. Notes payable: not bank (for loans with interest)
3. Trial balance
a. Debit side must balance credit side
4. Accrual basis accounting under GAAP accounting method (we use this one)
a. Revenue recognition principle: revenue is recorded when company delivers
goods or provides services
b. Cash basis accounting (not gaap), revenues and expenses are recorded when
company receives or pays cash
5. Adjusting entries: needed because of timing difference in accrual basis – recording
and posting
a. Two categories
i. Prepayments: prepaid expenses, deferred revenue
ii. Accruals: accrued expense, accrued revenue

6. Financial statements:
a. Trial balance
b. Income statement: rev – expenses – dividends
c. Balance sheet: NCA + CA (left-hand side), NCL +CL +STOCKHOLDERS’ EQUITY
(right hand side)
 d.
7. Closing entries
a. Permanent accounts:
i. All balance sheet accounts-assets, liabilities, common stock &
retained earnings
ii. These balances are carried forward to the next accounting period
b. Temporary accounts:
i. All income statement accounts: sales, cost of goods sold, expenses,
dividends
ii. These balances are transferred to the retained earnings account
(respective to dr and cr)
iii. These accounts start with zero for next period
 c.
CHAPTER 4:
1. Reasons for difference in bank and company cash balance
a. Timing difference: especially cheques
b. Errors
2. Bank reconciliation
a. CHECKS OUTSTANDING (FOR BANK) – HAS TO BE DEDUCTED SINCE CHECKS
ARE ISSUED BY COMPANY FOR PAYMENT -- expense
b. DEPOSITS OUTSTANDING (FOR BANK) – HAS TO BE ADDED SINCE CHECKS ARE
ISSUED BY OUTSIDERS TO PAY COMPANY -- income
c. Bank’s side
i. Add any deposit cheques that the company has received but not yet
added to the bank’s record
ii. Subtract any payment cheques issued by company that have not been
recorded by the bank
iii. +/- bank errors
d. Company’s side
i. Add:
1. Cheques collected by bank
2. EFT incoming
3. Bank account interest earned
ii. Subtract:
1. EFT outgoing
2. Debit card purchases: deducted immediately from bank
account but company not aware
3. NSF Check
4. Bank service fees
iii. +/- company errors
iv. Updating company records after bank reco
  Recording items that increase cash
o Cash Dr
 Notes receivable Cr
 Interest revenue Cr
 Items that decrease cash
o Utilities expense Dr
o Accounts receivable (NSF Check)
o Service fee expense
o Advertising expense
 Cash Cr
3. Cash reporting
a. Balance sheet – cash is a current asset
b. Statement of cash flows – to show inflow and outflow of cash
i. Operating: arising from revenue and expense activities
ii. Investing: purchase and sale of long term assets
iii. Financing: external financing—issuance of stock, loans, repayment

c.
CHAPTER 5:
1) Credit sales: seller transfer goods to buyer now and expects to collect cash on a later
date
a. For balance sheet – stored under accounts receivable in current assets
b. Sales transaction
i. Accounts receivable dr, services revenue cr
c. Receiving cash
i. Cash dr, acc rec cr
2) Net revenue
a. Revenue reduction for customer
i. Trade discounts
ii. Sales discounts
iii. Sales allowances
iv. Sales returns
v. Net revenue = gross revenues - Sales discounts, Sales allowances,
Sales returns
vi. Trade discounts not deducted cuz gross revenues are recorded at the
discounted amount
3) NO ACCOUNT TO KEEP TRACK OF TRADE DISCOUNTS – RECORD THE DISCOUNTED
VALUE AS THE REVENUE ITSELF

4) Sales returns: sales returns Dr, accounts receivable Cr

5) Sales allowance: reduction in pricing of products due to faultiness
a. Sales allowance dr, accounts receivable cr
6) Sales discounts reduction in payment if customer pays within time
a. 2/10: 2% discount in paid within 10 days
b. n/30: no discount – full payment due within 30 days
c. cash & sales discount dr, accounts receivable cr
7) Allowance for uncollectible accounts
a. Establish in year one – estimating future uncollectible accounts
b. Year 2- write off
c. End of year 2: ADJUST allowance by estimating future considering previous
allowance balance
8) Establishing allowance for uncollectible accounts
a. ALLOWANCE IS A CONTRA ACCOUNT – DEDUCT FROM ACCOUNTS
RECEIVABLE
b. Establishing – bad debts expense dr, allowance cr
9) Writing off:
a. Happens when you know for sure you wont receive the money for a certain
good/service sold on account
b. Writing off: allowance for uncollectible accounts dr, accounts receivable cr
c. No effect on total assets and net income
 i. since both decrease by same amount, difference remains the same
ii. bad debts expense account adjusted at the end of year when
uncollectible accounts is adjusted
10) Recover:
a. Establish accounts receivable again by reversing previous write off:
i. Accounts receivable dr, uncollectibles cr
b. Pay off:
i. Cash dr, accounts receivable cr
c. No effect on balance sheet, no change
11) Adjusting allowance
a. Estimate next year’s allowance using percentage/aging method
b. If cr balance on allowance acc is 6 million, 4 million written off and estimate
for next year in 7 million – difference is 5 million
c. Adjust: bad debts expense dr, allowance for uncollectible acc cr – 5 mil
12) Allowance method
a. Percentage of receivables method
i. 20% of accounts receivables at the end of 2025 will not be collected--
$6m
ii. Adjust balance from 2m to 6m
iii. Bad debts dr, allowance cr -- $4m

CHAPTER 6:
1) Inventory: raw materials, work in progress, finished
2) Inventory ending balance: cost of inventory not yet sold
3) COGS: cost of inventory sold
4) COGS = beginning inventory + purchases + freight in + any other expenses related to
the purchase – ending inventory
5) Inventory cost methods
a. Specific identification: matching each unit with its actual cost
i. Rarely used in the real world – mainly for expensive goods like jewelry
etc.

b. FIFO Method: first in first out

 i. Assume that that the first units purchased are the first ones out
ii. Generally don’t consider the time of transactions – just go on what is
there in the end – USED PERIODIC INVENTORY SYSTEM FOR THIS
iii. In perpetual: time of transactions such as sales and purchases is
considered

c. LIFO Method: last in first out

i. Assume that the last units purchased are the first units out
ii. Generally when inventory costs are rising, this method is used to
increase expenses and reduce tax

d. WAC method
i. Assumes that cost of goods sold and inventory consist of a random
mixture of all goods available
ii. Each unit of inventory assumed to have same average cost
 iii. Weighted average unit cost = total cost of goods available for
sale/units available for sale

6) Choice of inventory cost methods:

a. When costs are rising
i. FIFO: highest ending inventory, lower COGS -- high gross profit
ii. LIFO: Lowest ending inventory, Highest COGS – low gross profit
iii. WAC: between LIFO & FIFO amounts
b. When costs are falling
i. LIFO: highest ending inventory, lower COGS -- high gross profit
ii. FIFO: Lowest ending inventory, Highest COGS – low gross profit
iii. WAC: between LIFO & FIFO amounts
c. FIFO – under inflation, higher assets and profits
d. LIFO – under inflation, tax savings from lower profits
e. Firms that use LIFO should record LIFO Reserve = difference between LIFO
amount and amount if FIFO was used
7) Inventory recording systems
a. Perpetual: recorded on a continual basis
i. Beginning inventory + purchases – COGS = Ending inventory
b. Periodic not continual, inventory calculated once per period
i. Beginning inventory + purchases – Ending inventory = COGS

8) Perpetual inventory system

a. Purchases and sales recording
i. Purchase: Inventory dr, accounts payable cr (on account)
ii. Sales:
1. accounts receivable dr, sales revenue cr (on account),
2. COGS dr, inventory cr
iii. Sales revenue are recorded at sales price, COGS recorded at cost price
iv. Add in LIFO adjustment as well if the company uses LIFO.
 1. In example below, the prices are increasing for purchases.
Using LIFO means higher COGS and lower ending balance.
Ending balance is $1600, therefore we have to reduce
inventory balance by $600 – dr COGS, Inventory cr

9) Inventory costs
a. Comprises cost of purchase, conversion, and other costs to bring inventories
to present location (transport, tax conversion)
b. Deduct purchase discounts, returns and trade discounts
c. Freight charges:
i. FOB shipping point: ownership of goods passed on when inventory
leaves supplier’s warehouse
ii. FOB Destination: ownership passes when goods arrive at buyer’s
place
iii. freight in
1. record as part of the cost for inventory purchased
2. when sold, it becomes part of COGS
3. dr inventory, cr cash – payment of freight in
iv. freight out
1. charges on shipment to customers
2. report as expense on income statement
d. purchase discounts
i. discount for quick payment
ii. purchase – inventory dr, accounts payable cr
iii. payment within stipulated dates – accpunts payable dr, cash cr,
inventory cr (don’t say “purchases discount” – just paying less so
remove from COGS
e. purchases returns
i. returned to supplier – damaged or not what ordered
ii. accounts payable dr, inventory cr
f. Inventory shrinkage or damage
 i. If the amount based on physical count is less than the amount on
book or some found to be damaged – we treat it as shrinkage or
damage
ii. Recorded as an expense
iii. Dr COGS, cr inventory – can be recorded as “inventory shrinkage”, etc
instead of cogs
10) Lower of cost and Net Realizable Value
a. If cost of inventory falls below original cost, record at the lower net realizable
value
b. If original cost is lower than NRV, record at original
c. Record year end adjustment for NRV as an expense under COGS

d.

11) Inventory errors

a.
 b.

CHAPTER 7:
1) Cost of an asset = original cost + expenditures necessary for intended use
a. Capitalize: expenditure paid to bring the asset to desired condition and
location for use. Expensed over time.
b. Expense: recurring cost that benefits company only in the current period is
recorded as an expense.
2) Long term assets
a. Land:
i. cost is the purchase price + all other expenditure (attorney fees, real
estate agent commissions, title, title search, back property taxes to
get title clearance, current year taxes)
ii. Property taxes after current period is recorded as an expense
iii. Cash received from selling salvaged building materials – reduces cost
of land
iv. Land- indefinite use -- unlimited
v. Land improvement: sprinklers, etc – limited useful lives – recorded
separately
b. Buildings:
i. Cost = purchase price + cost of getting building ready
ii. Limited useful life
c. Equipment:
i. Machinery
ii. Cost = purchase price + installation, shipping, etc
iii. Recurring costs – expense not capitalized
iv. Limited useful life
d. Natural resources:
i. Cost = purchase + other
ii. Limited useful life
e. Intangible assets
i. Purchased or developed
 ii. Patents:
1. Exclusive right for product or process
2. Purchase: patent and other acquisition cost
3. Developed – r&d cost
4. Limited
iii. Copyrights:
1. Exclusive right for art
2. Purchase: patent and other acquisition cost
3. Limited
iv. Trademark/brand:
1. Word slogan symbol
2. Acquired: purchase price + legal, etc
3. Developed: advertising
4. Limited or unlimited
v. Franchises
1. Franchisee capitalizes initial franchise fee
2. Additional periodic payments
3. Limited
vi. Goodwill
1. When company acquires another
2. Recognizes brand name, customer base, etc
3. Unlimited
3) Basket purchase:
a. Buying more than one asset for one purchase price
b. Allocate total purchase to each asset account based on its relative fair value
c.

4) Expenditure after acquisition

a. Check slides

5) Depreciation
a.