Accounting Notes
Core Concepts
What is Accounting?
● The process of recording, classifying, summarizing, and interpreting financial
transactions.
● Provides information for decision-making.
● "The language of business."
Key Principles
● GAAP (Generally Accepted Accounting Principles): A common set of
accounting standards, rules, and procedures.
● Accrual Basis: Recognize revenues when earned and expenses when incurred,
regardless of cash flow.
● Matching Principle: Match expenses with the revenues they generate in the
same period.
● Going Concern: Assume the business will continue operating in the foreseeable
future.
● Cost Principle: Record assets at their historical cost.
● Consistency: Use the same accounting methods from period to period.
● Conservatism: Recognize potential losses but not potential gains.
● Business Entity Concept: Keep personal and business transactions separate.
The Accounting Equation
● Assets = Liabilities + Owner's Equity
○ Assets: What the company owns (e.g., cash, inventory, equipment).
○ Liabilities: What the company owes to others (e.g., accounts payable, loans).
○ Owner's Equity: The owners' stake in the company (e.g., capital, retained
earnings).
The Accounting Cycle
1. Identify Transactions: Determine which business activities are financial
transactions.
2. Record Transactions: Create journal entries to record each transaction.
3. Post to Ledger: Transfer journal entry information to individual accounts in the
ledger.
4. Prepare Trial Balance: List all accounts and their balances to ensure debits
equal credits.
5. Adjusting Entries: Make entries for items not previously recorded (e.g.,
depreciation, accrued expenses).
6. Prepare Financial Statements: Create the income statement, balance sheet,
and statement of cash flows.
7. Closing Entries: Transfer temporary account balances to permanent accounts.
8. Post-Closing Trial Balance: Verify that debits equal credits after closing entries.
Financial Statements
Income Statement
● Reports a company's financial performance over a specific period.
● Revenues - Expenses = Net Income (or Net Loss)
● Key components:
○ Revenue
○ Cost of Goods Sold (COGS)
○ Gross Profit
○ Operating Expenses
○ Operating Income
○ Interest Expense
○ Income Tax Expense
○ Net Income
Balance Sheet
● Shows a company's financial position at a specific point in time.
● Assets = Liabilities + Owner's Equity
● Key components:
○ Assets
■ Current Assets (e.g., cash, accounts receivable, inventory)
■ Non-Current Assets (e.g., property, plant, and equipment (PP&E),
intangible assets)
○ Liabilities
■ Current Liabilities (e.g., accounts payable, salaries payable)
■ Non-Current Liabilities (e.g., long-term debt)
○ Owner's Equity
■ Common Stock
■ Retained Earnings
Statement of Cash Flows
● Reports the movement of cash into and out of a company during a specific
period.
● Key components:
○ Operating Activities: Cash flows from day-to-day business operations.
○ Investing Activities: Cash flows from buying or selling long-term assets.
○ Financing Activities: Cash flows from raising capital (e.g., debt, equity) or
repaying it.
Key Accounting Terms
● Account: A record used to accumulate changes in specific items (e.g., cash,
accounts receivable).
● Journal: A chronological record of transactions.
● Ledger: A collection of all accounts used by a business.
● Debit (Dr): The left side of an account.
● Credit (Cr): The right side of an account.
● Inventory: Goods held for sale to customers.
● Depreciation: The allocation of the cost of a long-term asset over its useful life.
● Amortization: The allocation of the cost of an intangible asset over its useful life.
● Receivables: Amounts due from customers.
● Payables: Amounts due to suppliers or others.
● Retained Earnings: The accumulated profits of a company that have not been
distributed as dividends.
● Cost of Goods Sold: The direct costs attributable to the production of the goods
sold in a company
