Chapter 1: Accounting in Action

1. What is Accounting?
o Accounting is a process that tracks and reports on financial
activities. It involves:
 Identifying economic events (like sales or purchases).
 Recording those events in an organized manner.
 Communicating the financial information to people like
investors, managers, and creditors.
2. Users of Accounting Information:
o Internal Users: Managers, employees, and others inside the
business who use accounting to make decisions (e.g., should a
product line be discontinued?).
o External Users: People outside the business, like investors and
creditors, who rely on financial reports to evaluate performance.
3. Basic Accounting Equation:
o Formula: Assets = Liabilities + Owner’s Equity
 Assets: What the business owns (cash, inventory,
buildings).
 Liabilities: What the business owes (loans, bills).
 Owner’s Equity: The owner’s claim on the business after
liabilities are paid.
o This equation shows that everything a business owns (assets) is
financed either by what it owes (liabilities) or by the owner’s
investment (equity).
4. Ethics in Accounting:
o Ethics is essential in accounting. To prevent fraud and unethical
behavior, rules like Sarbanes-Oxley Act (SOX) require
businesses to be transparent and honest in their financial
reporting.
5. Generally Accepted Accounting Principles (GAAP):
o These are the rules accountants follow to ensure financial reports
are reliable and consistent.
o Cost Principle: Record assets at their original cost, not current
market value.
o Assumptions:
 Monetary Unit Assumption: Only transactions that can
be measured in money are recorded.
 Economic Entity Assumption: The business’s finances
must be kept separate from the owner’s personal finances.
6. Financial Statements:
o Income Statement: Shows revenues, expenses, and profit or
loss.
o Owner’s Equity Statement: Tracks changes in equity over a
period.
 o Balance Sheet: A snapshot of the company’s assets, liabilities,
and equity at a point in time.
o Cash Flow Statement: Tracks the inflow and outflow of cash.

Chapter 2: The Recording Process

1. The Account:
o An account is where increases and decreases in specific assets,
liabilities, or equity items are recorded (e.g., a cash account, a
revenue account).
2. Debits and Credits:
o Debits (Dr.): Typically increase assets and expenses and
decrease liabilities and equity.
o Credits (Cr.): Typically increase liabilities, equity, and revenue
and decrease assets.
o Every transaction has both a debit and a credit, and they must
always balance.
3. Recording Transactions:
o Journal: Where transactions are first recorded in chronological
order.
o Ledger: Where each account’s individual transactions and
balance are recorded.
o Posting: Moving information from the journal to the ledger.
4. Trial Balance:
o A list of all the accounts and their balances at a particular date,
ensuring total debits equal total credits to check for accuracy.

Chapter 3: Adjusting the Accounts

1. Accrual Accounting:
o Accrual Basis: Revenue is recorded when it’s earned, and
expenses are recorded when they are incurred, regardless of
when the cash is exchanged.
o Revenue Recognition Principle: Record revenue when the
service or product is provided, not when the cash is received.
o Matching Principle: Expenses should be recorded in the same
period as the revenue they helped generate.
2. Adjusting Entries:
o Adjusting entries are made at the end of an accounting period to
ensure all revenues and expenses are recorded properly.
o Types of Adjusting Entries:
  Prepaid Expenses: Things paid for in advance (like rent
or insurance). These are recorded as assets but become
expenses over time.
 Unearned Revenues: Money received before the service
is provided. It’s recorded as a liability and recognized as
revenue when the service is delivered.
 Accrued Revenues: Revenue earned but not yet
received.
 Accrued Expenses: Expenses incurred but not yet paid
(like unpaid salaries).
3. Adjusted Trial Balance:
o After making all adjusting entries, an adjusted trial balance is
prepared. This ensures that all entries are correctly recorded and
balanced before financial statements are prepared.