1. CH 1
Accounting
The act of collecting,processing,interpreting,analyzingandprojectingfinancialinformation.
Account
A categoryor class of accountinginformation.A device forkeepingtrackof increasesanddecreasesin
individualassets, liabilitiesandowner’sequity.
Accounting system
The methodwhichisusedto collect,process,and reportthe neededdataabouta business,
governmentunitortype of otherassociation.
Uses of accounting :
To provide informationwhoneedthat.
Internal andexternal stake holders,creditors,tax authorities,decisionmaker,employeesstockoption
programs( ESOP)
Financial accounting
The act of gatheringand reportingfinancialinformation tousersoutside of (external to) the
organizationbeingaccountedfor.(general purpose reportsforexternal users)
Managerial Accounting
Providesthe usefulinformationtothe manager(internal users) of the organizationfordecisionmaking.
( specializedreportsforinternalusers)
Balance sheet
It showsthe financial positionorconditionof anorganizationata particularpointintime .
2. Assets
The economicresources( properties,possessions) of anorganizationrefferedtoasassets.
Liabilities
Economic obligationsof anorganization(amountsowned tocreditors) are calledliabilities.
Owner equity / Capital
Ownersclaimsare refferedtoasownerequity/capital .
Income statement
It showsthe resultsof operatingfora periodof time .It is sometimescalled anoperatingstatementor
statementof operations
Netincome = revenue – expense
Revenue
The inflowof assetsinreturnforservicesperformedorproductsdeliveringduringaperiod.
Expense
A sacrifice orcost incurredto generate revenue.
Net income
The amount by whichthe revenue foraperiodexceedthe expensesincurredtogenerate them.
Statement of changes in financial position ( funds statement)
A financial statementthatshowsthe resourcesandusesof financial resourcesduringaperiodof time .
3. Bookkeepers
Performthe routine ,repetitive taskof collectingandprocessingfinancial information.
One whoperformsthe routine recordkeepingtasksinan accountingsystem.
Accountant
One whodesignssystems,supervise bookkeepers:prepares analyzesandinterpretsfinancial reports
Auditsaccountingrecordsandperformsothercomplex accountingactivities.
Public accountants
One whowork individuallyorinpublicaccountingfirmstoprovide accountingservicestoothersfora
fee. publicaccounting( auditing,tax services,managementservices)
Private accountants
Accountants employedbythe organizationsonasalariedbasisare sometimesreferredtoasprivate
accountants. private accounting ( general accounting,costaccounting,internalaccounting,budgeting
accountingsystemandtax accounting).
Governmental accounting
Governmentunitsmustcollectandreportfinancial information,aprocesssometimesrefferedas
governmental accounting.
Auditing
It isa processof examiningaconcern’sfinancial statementsandthe underlyingaccountingrecordsto
determine whetherthe statementsare presentedfairly.
Internal auditing
The processperformedbyan organization’sownaccountantstoensure thatitsrecordkeepingis
efficientlyperformedandrelativelyfree fromerrors.
Budgeting
The processof projectingfuture financial outcomesforanorganizationandsubsequentlythe
projectionstothe actual result.
Cost accounting
The identificationandcontrol of costsand the processingandreportingof costinformation.
4. Transaction
It issimplyaneconomiceventthatrequiresaccountingrecognition.
Compound transaction
The transactionthat involvesmore thantwoaccounts.
Realization Concept
The recognitionof revenue assoonasit isearnedeventhroughmoneywillnotbe receiveduntil lateris
referredtoas the realizationconcept.
Matching Concept
Expensesare incurredforthe purpose of generatingrevenues.
Revenuesshouldbe matchedwiththe expensesthatwere responsible fortheirgeneration.
Depreciation
It issimplythe conversionof aportionof the cost of a longterm productive assetstoexpense asassetis
wornout inthe processof generatingrevenue .
Time period concept
The activitiesof anentityare capable of beingidentifiedwithparticularcalendaraccountingperiods.
Accounting equation
An expression of the equalityof anentity’sassetswiththe claim’sagainstthem.
Assets = liabilities + owner’s equity
Cost concept
The accountingconceptof recordingandmaintainingassetsinthe recordsattheircost bases.
Entity concept
The accountingassumptionthateachorganizationforwhichwe account isan independententity
separate fromitsownermanagerscustomerscreditorsandall otherpersonsandentrieswithwhichit
deals.
Monetary concept
The accountingassumptionthattransactionscan be statedintermsof monetaryunits.
Netloss The amountby whichexpensesexceedrevenuesforaperiodof time .
5. CH 2
Chart of accounts
General Ledger (ledger ( a group of accounts )
A collectionof asset,liabilityandownersequityaccountsthatmake upthe accountingequationfora
particularentity
7. Temporary equity(nominal) accounts
Revenue andexpense accountsare calledtemporaryequityaccountsbecause atthe end of each
accountingperiodtheirbalancesare transferredtothe permanent(real) equityaccounts.
Permanent equity(real) accounts
Theyare the assets,liabilitiesandowner’sequityaccountsthatare notclosedat the endof an
accountingperiod.
Contra account
It isthe accountthat accumulatesdecreasesforanotherrelatedaccount.
Account Balances
Whenthere ismore than one account inT-account , an account balance maybe determinedbyadding
each side andsubtractingthe smallertotal fromlarger.
Statement of owner capital
It explainshowthe owner’sequityaccountgotfromthe balance at the beginningof aperiodtothe
balance at the end.
Forms of businessorganization
Proprietorship
A businesswithonlyone owner.
Partnership
A businessconcernjointlyownedbytwoor more persons .
Corporation
It isan associationinwhichownershipisrepresentedbysharesof stock.
Charter A corporationiscreatedby the state government,whichissuesalegal documentcalled
charter .
8. Credit
An accountingtermforthe directionright,usuallyreferringtoanamountcolumnto the right.
Debit
An accountingtermforthe directionleft,usuallyreferringtoanamountcolumnto the left.
The frame work of accounting systems
1 Documenting
The accountingfunctionof notingtransactionbymeansof source documents.
Source documents
The varioustransactionsexperiencedbyanentityare usuallynotedonbusinessformscalledsource
documents.
2 Recording
The accountingfunctionof registeringtransactionsandeventschronological order( bydate ).
Journal
It issometimesalsoreferredasplace of original entrybecause itisthe place where transactionsare first
listedinaformal manner.
3 Summarizing
The accounting functionof classifyinginformationintoaccountcategories.
4 Reporting
The accountingfunctionof providinginformationtopeoplewhoneedit.
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Posting
The act of transferringfroma journal toledgeraccount.
9. Trial Balance
It isan informal accountingschedulethatliststhe ledgeraccountbalancesata pointintime and
comparesthe total of debitbalance tothe total of creditbalance.Purpose of itisto 1 To checkthe
equalityof debitandcredit. 2 To provide informationforuse inpreparingstatements.
Errors
Errors that cause imbalance ( disturb balance )
1 Transpositionof digitswithinanaccount.
2 Failure topostone side of a journal entry.
3 Postingacreditas a debitorvice versa.
Errors that do not cause imbalance ( do not disturb balance )
1 Double transposition
2 Reversingdebitsandcredits
3 Omission of entries or failure to post entire entries
10. Accounting statements
A formal presentationof accountingdata.
Double-entry accounting
The requirementthatdebitsof eachentrybe accompaniedbyanequal amountof credit.
Special journal
A journal speciallydesignedforrecordingtransactionsof acertaintype.( cash receipts).
Subsidiary ledger
A ledgerthatprovidesdetailedinformationasasupplementtoa general ledger.
Transposition error
An errormade by reversingtwodigitof anumber.
CH 3
Adjusting entries ( why adjusting entries are necessary )
They are special entries made at the end of an accounting period to update and correct
information shown in the accounts .
Accrual
It issimplythe processof growing,arising, or comingintoexistence .
Revenue Accruals and Expenses Accruals