Accounting Principles and Business Types

• Accounting rules are set by the Financial Accounting Standards Board (FASB).
• These rules are known as Generally Accepted Accounting Principles (GAAP).

Principles & Assumptions

• The Economic Entity Assumption states that the financial activities of a business should be separate from its owners.
• The Revenue Recognition Principle states that revenue is recognized when it is earned, not when cash is received.
• The Expense Recognition (Matching) Principle states that expenses are recognized in the period when the related revenue is recognized.
• The Cost Principle states that assets are recorded at their historical cost.

Business Types

• Corporations are separate legal entities from their owners, have shareholders, and limited liability.
• Partnerships involve two or more owners who share profits and liabilities.
• Sole Proprietorships are owned by a single individual who has unlimited liability.

Accounting Equation

• Assets = Liabilities + Equity.
• Basic calculations involve simple math using this equation.

Accounting Elements

• Assets are resources owned by the business.
• Liabilities are obligations of the business.
• Equity represents the owner’s residual interest in the business.
• Revenues are earnings from business operations.
• Expenses are costs incurred in running the business.

Journal Entries

• Debit (Dr) increases assets or decreases liabilities and equity.
• Credit (Cr) increases liabilities or equity and decreases assets.

Normal Balance

• Assets typically have a Debit normal balance.
• Liabilities typically have a Credit normal balance.
• Equity typically has a Credit normal balance.
• Revenues typically have a Credit normal balance.
• Expenses typically have a Debit normal balance.

Trial Balance

• A trial balance lists all accounts and their balances to check the accuracy of the accounting records.

Cash vs. Accrual Accounting

• Cash Accounting recognizes revenues and expenses when cash is received or paid.
• Accrual Accounting recognizes revenues and expenses when earned or incurred, regardless of cash flow.

Contra-Account

• A contra-account offsets the balance of a related account.
• Accumulated Depreciation is a contra-asset account example.

Book Value

• It is the value of an asset after depreciation or amortization.

Adjusting and Closing Entries

• Adjusting Entries record deferrals and accruals to reflect the correct financial position at the end of a period.
• Closing Entries transfer temporary account balances (revenues and expenses) to retained earnings.

Temporary vs. Permanent Accounts

• Temporary Accounts include revenues and expenses, which are closed to retained earnings at the end of the period.
• Permanent Accounts include assets, liabilities, and equity, which carry their balances forward.

Classifying Accounts

• Classify each account as asset, liability, equity, revenue, or expense.
• Identify the normal balance (debit or credit) for each account.

Net Income, Retained Earnings, and Classified Balance Sheet

• Net Income = Revenues - Expenses.
• Retained Earnings is affected by net income and dividends.
• A Classified Balance Sheet groups assets and liabilities into current and non-current categories.

Financial Statements

• The Income Statement includes revenues and expenses.
• The Balance Sheet includes assets, liabilities, and equity.

Problems - Journal Entries

• Practice recording regular journal entries based on transactions like cash received or equipment purchased.

Problems - Adjusting Entries

• Record adjusting entries for accruals and deferrals, such as unearned revenue and prepaid expenses.

Problems - Closing Entries

• Understand the purpose of closing entries, which is resetting temporary accounts to zero.
• Know how to perform closing entries.

Problems - Financial Statement Preparation

• Prepare an income statement, statement of retained earnings, and balance sheet using given account balances.

Problems - Classifying Accounts

• Classify accounts as assets, liabilities, or equity.
• Apply the normal balance for each classification.

Learn about the accounting rules set by the Financial Accounting Standards Board (FASB), known as Generally Accepted Accounting Principles (GAAP). Understand the Economic Entity, Revenue Recognition, Expense Recognition, and Cost Principles. Explore business types: Corporations, Partnerships, and Sole Proprietorships.