Accounting consists of three basic activities—it identifies, records, and communicates the

economic events of an organization to interested users.

The accounting profession has developed standards that are generally accepted and universally
practiced. This common set of standards is called generally accepted accounting principles
(GAAP).
The primary accounting standard-setting body in the United States is the Financial Accounting
Standards Board (FASB). The Securities and Exchange Commission (SEC) is the agency of
the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.
The SEC relies on the FASB to develop accounting standards, which public companies must
follow. Many countries outside of the United States have adopted the accounting standards
issued by the International Accounting Standards Board (IASB). These standards are called
International Financial Reporting Standards (IFRS)
As markets become more global, it is often desirable to compare the results of companies from
different countries that report using different accounting standards. In order to increase
comparability, in recent years the two standard-setting bodies have made efforts to reduce the
differences between U.S. GAAP and IFRS. This process is referred to as convergence.

Companies prepare 4 financial statements from the summarized accounting data:

An income statement presents the revenues and expenses and resulting net income or net loss
for a specific period of time.
A retained earnings statement summarizes the changes in retained earnings for a specific
period of time.
A balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a
specific date.
A statement of cash flows summarizes information about the cash inflows (receipts) and
outflows (payments) for a specific period of time.
Expanded accounting equation
TRANSACTIONS

Investment of Cash by Stockholders

Purchase of Equipment for Cash

Purchase of Supplies on Credit

Services Performed for Cash

Purchase of Advertising on Credit

Services Performed for Cash and Credit

Payment of Expenses

Payment of Accounts Payable

Receipt of Cash on Account

Dividends

____________________________________
SUMMARY OF TRANSACTIONS

DEBITS AND CREDITS

Example: Starbucks
(1) Borrows 6,000 -> dr cash, cr note payable
(2) Purchase equipment for 10,000, pay 2000 in cash and signs a note for the rest -> cr -2000
cash, dr 10000 equip, cr 8000 note payable
(3) Purchase coffee beans for 4000 on account -> cr 4000 account payable, dr 4000 supplies
(4) Pays the outstanding payable (4000) to its suppliers -> dr -4000 accounts payable, cr
-4000 cash
(5) Sells 7000 worth of coffee to customers -> dr 7000 cash, cr 7000 SE (Rev)
(5a) The supplies to prepare the coffee cost 3000 -> dr -3000 cost of goods sold, cr -3000
supplies

TRIAL BALANCE

SnowGo Corp.
Trial Balance
December 31, 2022

Debit Credit

Cash 7000

Accounts Receivable 4000

Equipment 88,000

Prepaid Insurance 6000

Notes Payable 19,000

Accounts Payable 22,000

Salaries and Wages Payable 2000

Common Stock 20,000

Service Revenue 95,000

Salaries and Wages Expense 42,000

Utilities Expense 3000

Dividends 8000

158,000 158,000

Trial Balance #2

Debit Credit

Cash 17,000

Accounts Receivable 8,000

Equipment 50,000

Prepaid Insurance 2,000

Supplies 3,000

Notes Payable 19,000

Accounts Payable 7,900

Salaries and Wages Payable 1,000

Unearned Service Revenue 2,500

Retained Earnings 5,000

Common Stock 42,000

Service Revenue 11,000

Gas and oil expense 800

Insurance Expense 600

Salaries and Wages Expense 5,000

Maintenance expense 1,100

Dividends 900

88,400 88,400
Adjusting entries: every time preparing a financial statement

Accrual-basis net income: companies recognize revenues when they perform services (rather
than when they receive cash) in the period the events occur.

Investing in PPE:
Expense called depreciation
Depreciation is an allocation of an asset’s cost over its (estimated) useful life

Contra Asset Account: keep track of asset’s historical cost

Net PPE = EB PPE - EB Accumulated Depreciation

Deferrals | Accruals

Deferrals: Cash before Service

Accruals: Service before Cash

Accrual of Interest Expense: When a firm borrows money, it must repay: Principle (amount
borrowed) and Interest

→ Interest = Principle x Annual Interest Rate x Time

Closing → Ending Balance = 0:

*credit expenses and dividends (only when closing)
Revenue
Income Summary
Income Summary
Expenses
Income Summary
Retained earnings
Retained earnings
Dividends
Cost flow methods:
- LIFO (Last-in, First-out): Record last purchases in COGS
- FIFO (First-in, First-out): Record first purchases in COGS

Inventory Method:
BB + Purchases - COGS = EB

(ending inventory)

FIFO: highest ending inventory

LIFO: highest COGS
(Why? THe units bought earlier were ‘cheaper’)
Example

Beginning Inventory 4000 units at $3

Purchases 6000 units at $4

Sales 7000 units at $12

Determine COGS using

a) FIFO
b) LIFO
c) average-cost method

Ending inventory = 4000 + 6000 - 7000 = 3000 units

COGS available for sale = 12k + 24k = 36,000
a) 36,000 - (3000 x 4) = 24,000
b) 36,000 - (3000 x 3) = 27,000
c) 36,000 : (4000 + 6000) = 3.6
Average cost = 25200

Net Realizable Value: amount the company expects to realize (from the sale of inventory)
Lower-of-cost-or-net-realizable value: Net Realizable Value < Cost → write down the asset

Example: Calculate the ending inventory and COGS

COGs available for sale = $938
Ending inventory in units = 93 - 74 = 19
a) FIFO: Ending inventory = 938 - (11 x 19) = 729
COGS = 938 - Ending inventory = 209
b) LIFO
Ending inventory = 938 - (9 x 19) = 767
COGS= 938 - 767 = 171
c) 938:93 = 10.09
Average COGS = 10.09 x 74 = 746.37
 Net A/R = Gross A/R - Allowance for Bad Debts

Sales discounts (ex 2/10, n/30) and Sales returns:

Dr Sales Discounts
Sales Returns
Cr Accounts Receivables

Net sales = Sales revenue - Sales discounts - Sales returns

Dr Cost of Goods Sold

Cr Inventory
A/C
Rev
Sales returns
A/C
Cash
A/C
Sales returns
A/C
Bad Debt Expense
Allowance for Bad debt

Depreciation

Straight-line = (Cost - Residual Value) / Useful Life

Declining-balance = (Cost - Acc/Depreciation) x Factor/Useful Life

Unit-of-activity = (Cost - Residual Value) / Est.Units (expense per unit)

(Net Book Value > = Residual)

a)6900
b)20.2941
c)2022: 15000
2023: 36000
2024: 45600
Impairment:
Dr. Impairment loss
Cr. Acc/Impairment
(decrease NBV)

Expenditures

Capital expenditure Ordinary repair expenditure

↓ ↓
Increase BV PPE Expense / decrease NI
↓ ↓
B/S I/S

Current BV: NBV = Cost - Acc/Depreciation

Revised Depreciation = Current bv - Revised salvage value

Sales Tax Payable:
Dr. Cash
Cr. Sales Revenue
Sales Tax

Unearned Revenue:
Dr. Cash
Cr. Unearned Revenue

Notes Payable:
Interest = Principle x (annual) interest rates x

Stockholders' Equity:
IPO
SEO
Additional paid-in capital (APIC) is the difference between the par value of a stock and the price
that investors actually pay for it
Treasury Stock: contra stockholders equity acc (dr balance)
Paid-in Capital from treasury stock (only when sufficient credit balance) → or else retained
earnings for the insufficient amount

Common Stock ≠ Preferred Stock (Dividend)