Normal balance refers to the typical debit or credit classification of accounts in a double-entry accounting system. Asset and expense accounts typically have debit normal balances, while equity, liability, and revenue accounts typically have credit normal balances. This classification determines whether increases to an account are recorded as debits or credits.

1. normal account balance
Type of balance expected of a particular account based on its balance sheet classification. Normally,
asset and expense accounts have debit balances, and equity, liability, and revenue accounts have
credit balances. Also called normal balance.
NORMAL BALANCE
NORMAL BALANCE, in accounting, is the side of an account, whether debit or credit,
to which increases to the account are recorded.
Definition
Normal balance is the accounting classification of an account. It is part of Double-entry book-keeping
technique.
An account has either credit (Abbrev. CR) or debit (Abbrev. DR) normal balance. To increase the value of
an account with normal balance of credit, one would credit the account. To increase the value of an
account with normal balance of debit, one would likewise debit the account.
The fundamental accounting equation is the following:
Asset = Liability + Shareholder Equity
The account on left side of this equation has a normal balance of debit. The accounts on right side of this
equation has a normal balance of credit. The normal balance of all other accounts are derived from their
relationship with these three accounts.
COMPOSITION OF RETAINED EARNINGS STATEMENT
Retained earnings for the beginning of the month
Add: Net Income
Less: Dividends
Retained earnings, (end of month)
LEDGER ACCOUNT
The entire group of accounts maintained by a company (individual asset accounts,
individual liability accounts, individual stockholders’ equity, revenue, and expense
accounts).
Assets- cash, a/r, advertising supplies, prepaid insurance, office equipment, accumulated
depreciation- office equipment
Liabilities- notes payable, unearned service revenue (all payables)
Stockholders’ Equity-common stock, retained earnings, dividends, income summary
Revenue-service revenue
Expenses- all expenses
RULES OF DEBIT
ASSETS- Debits increase Credits decrease
LIABILITIES & STOCKHOLDERS’ Credits increase Debits decrease
REVENUE RECOGNITION PRINCIPLE requires that companies recognize revenue in
the accounting period in which it is earned

2. MATCHING PRINCIPAL the practice of expense recognition, the principle that dictates
that companies match efforts (expenses) with accomplishments (revenues)
TIME PERIOD ASSUMPTION an assumption that the economic life of a business can
be divided into artificial time periods
COMPUTATION OF NET INCOME UNDER ACCRUAL ACCOUNTING
• The first is the principle of accrual accounting. In accrual based accounting the revenue
from selling a good or service is recognized in the period in which the good is sold or the
service is performed (in whole or substantially). A corresponding effort is made on the
expense side to match expenses to revenues.
• The second is the categorization of expenses into operating, financing and capital
expenses. Operating expenses are expenses that, at least in theory, provide benefits only
for the current period; the cost of labor and materials expended to create products which
are sold in the current period would be a good example. Financing expenses are expenses
arising from the non-equity financing used to raise capital for the business; the most
common example is interest expenses. Capital expenses are expenses that are expected to
generate benefits over multiple periods; for instance, the cost of buying land and
buildings are treated as capital expenses.
The amount by which expenses exceed revenues
ADJUSTING ENTRIES ensure that the revenue recognition and matching
principles are followed. They are required every time a company prepares
financial statements. Every adjusting will include one income statement and
one balance sheet account.
Types of Adjusting Entries : prepaid expenses, unearned revenues, accured
revenues, accrued expenses, supplies, insurance
PERIODIC INVENTORY companies record revenues from the sale of
merchandise when sales are made. An inventory system in which a company
does not maintain detailed records of goods on hand and determines the cost
of goods sold only at the end of an accounting period. In order to do this
Beginning Inventory
+ Cost of goods purchased
Cost of Goods Available for Sale
-Ending Inventory
Cost of Goods Sold
An inventory system in which the balance in the inventory account is adjusted for the units sold
only at the end of the period.
PERPETUAL INVENTORY SYSTEM a detailed inventory system in which a
company maintains the cost of each inventory item and the records continuously
show the inventory that should be on hand. Merchandise Inventory is debited for
all purchases and freight cost. Credited for purchase discounts and purchase returns
and allowances.

3. Inventory sold…..A/R (for cash) is debited and Sales is credited
Cost of Goods Sold is debited and Merchandise Inventory is credited for the
cost of inventory items sold.
A system that continually tracks all additions to and deletions
from inventory, resulting in more accurate inventory records and a running total for
the cost of goods sold in each period.
COMPONENTS OF COST MERCHANDISE INVETORY
Beginning merchandise inventory $300 (30 units x $10 each)
Plus: purchases $1,320 (120 units x $11 each)
Merchandise available for sale $1,620
Less: cost of goods sold $850 (calculated above)
Ending merchandise inventory $770
• First-In First-Out (FIFO) assumes that the items purchased or produced first are sold first.
Costs of inventory per unit or item are determined at the time made or acquired. The oldest
cost (i.e., the first in) is then matched against revenue and assigned to cost of goods sold.
• Last-In First-Out (LIFO) is the reverse of FIFO. Some systems permit determining the
costs of goods at the time acquired or made, but assigning costs to goods sold under the
assumption that the goods made or acquired last are sold first. Costs of specific goods
acquired or made are added to a pool of costs for the type of goods. Under this system, the
business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
Such reserve (an asset or contra-asset) represents the difference in cost of inventory under
the FIFO and LIFO assumptions. Such amount may be different for financial reporting and
tax purposes in the United States.
• For merchandise purchased during the year, cost means the invoice price less appropriate discounts plus
transportation or other charges incurred in acquiring the goods. It can include other costs that have to be
capitalized under the uniform capitalization rules
• For merchandise produced during the year, cost means all direct and indirect costs that have to be the cost
of goods you purchased would be the invoice price, less appropriate discounts, plus transportation or other
charges you incur in acquiring the goods. capitalized under the uniform capitalization rules
the cost of goods you purchased would be the invoice price, less appropriate discounts, plus transportation
or other charges you incur in acquiring the goods.
SINGLE STEP INCOME STATEMENT
A single-step income statement is one of two commonly used formats for the income statement or profit
and loss statement. The single-step format uses only one subtraction to arrive at net income.

4. Net Income = (Revenues + Gains) – (Expenses + Losses)
Sample Products Co.
Income Statement
For the Five Months Ended May 31, 2010
Revenues &
Gains
Sales
$100,000
Revenues
Interest
5,000
Revenues
Gain on
Sale of 3,000
Assets
Total
Revenue & 108,000
Gains
Expenses &
Losses
Cost of
75,000
Goods Sold
Commission
5,000
s Expense
Office
Supplies 3,500
Expense
Office
Equipment 2,500
Expense
Advertising
2,000
Expense
Interest
500
Expense
Loss from
1,500
Lawsuit
Total
Expenses & 90,000
Losses
Net Income $ 18,000
In a single step income statement your fisrt line will be a total of your revenues, the seceond
line will be a total of your expenses and your third line will be your Gross Profit or Net
Income.
MULTIPLE STEP INCOME STATEMENT
The following is an example of a basic income statement prepared in the single-step format:
Revenues
Net Sales $1,000
Interest Income 100

5. Total Revenue $1,100
Expenses
Costs of Goods Sold $500
Depreciation 50
Advertising 50
Salaries 100
Supplies 100
Interest Expenses 50
Total Expenses $850
Net Income $250
MAIN POINTS OF DIFFERNCE AMONG THE 4 INVENTORY COST-
FLOW ASSUMPTIONS
Inventory cost flow assumptions is used by organizations to ascertain the cost of goods sold and ending inventory over a
specific accounting period. The key word in the concept is "assumption", organizations for example those into manufacturing
and distribution industry usually make assumptions that certain goods produced will be sold over a period of time while a
certain amount of goods will likely be maintained in inventory. The assumptions are primarily used for financial and tax
purposes. The different inventory cost flow assumptions include:
? FIFO (first­in; first­out): This cost flow assumption method is commonly used by organizations because it reflects the actual
flow of goods. The assumption takes into account that the goods purchased first will be sold first and goods that are
purchased at the end of the of the accounting period will be recorded as the ending inventory (Hallet, 2009).
? LIFO (last­in; first­out): In contrast with the FIFO method, this cost flow assumption does not follow the actual movement of
goods. The recent costs are assigned to goods sold while the oldest costs remain in inventory: The assumption used in the
LIFO methodology is that goods in inventory at the start of the accounting period will remain the same at the end of the
period. As stated earlier, it is only an assumption and does not reflect the actual movement of goods; however it could lead
to an understated value of inventory if used continuously over a long period of time (Hallet, 2009).
? Specific Identification: The specific identification assumption method is applied whenever a sale is deemed complete.
Then, the cost of the item is calculated and recorded as the cost of goods sold.
? Weighted Average Cost: This cost flow assumption methodology is applied when certain goods are considered
interchangeable but may have different purchase prices (Hallet, 2009).
MULTIPLE STEP INCOME STATEMENT
The following is an example of a basic income statement prepared in the multi-step format:
Revenues

6. Sales $1,000
Cost of Goods Sold $500
Gross Profit $500
Operating Expenses
Depreciation $50
Advertising 50
Salaries 100
Supplies 100
Interest Expenses 50
Total Operating Expenses $350
Operating Income $150
Other Income
Interest Income $100
Total Income $250
Prepare a multi-step income statement for Goodwin Co. from the following data for the year
ended December 31, 2008.
Goodwin Co.
Income Statement
For Year Ended December 31, 2008
Revenue:
Sales 925,000
less sales RNA 55,000
Net Sales 870,000
less Cost of Merch Sold 560,000
Gross Profit 310,000
Operating Expenses:
Selling Expenses 110,000
Administrative Expeses 30,000
Total operating expenses 140,000

7. Income from operations 170,000
Other Expenses and Revenue:
Plus Rent Revenue 20,000
Minus Interest Expense 10,000
NET INCOME: 180,000
. Sales (Revenue) minus Sales returns (Contra Revenue) gives you the net sales of our
merchandise. Then take net sales and subtract cost of merch, or what we paid to buy our
merchandise. This gives you our gross profit that we made from selling our merchandise. Then
add up administrative expenses and selling expenses and subtract from Gross profit to find
income from operations, or income from what we are in business to do, which is sell
merchandise or a product. Finally, add in other revenue to income from operations and subtract
other expenses and there you have net income!
ACCOUNTING INFORMATION SYSTEMS AND ITS COMPONENTS
An accounting information system (AIS) is a system of collection, storage and processing of
financial and accounting data that is used by decision makers. An accounting information system
is generally a computer-based method for tracking accounting activity in conjunction with
information technology resources. The resulting statistical reports can be used internally by
management or externally by other interested parties including investors, creditors and tax
authorities.
Accounting information systems are composed of six main components:[1]
1. People: users who operate on the systems
2. Procedures and instructions: processes involved in collecting, managing and storing the
data
3. Data: data that is related to the organization and its business processes
4. Software: application that processes the data
5. Information technology infrastructure: the actual physical devices and systems that
allows the AIS to operate and perform its functions
6. Internal controls and security measures: what is implemented to safeguard the data