Financial Accounting

Welcome to Financial Accounting, AKA Introduction to Accounting or Principles of Accounting I, ACG 1000. This course is being designed to introduce the basic skills needed in the field of accounting. As with all Wikiversity Courses, this is a continual joint collaboration among numerous sources, so please check back at regular intervals. Also, please feel free to use the discussion tab at the top of the page for any questions, comments, concerns, or ideas concerning this course.
Financial Accounting will be divided into sessions, each on its own page. Each session represents the material that would be in a single classroom period. This page is analogous to a syllabus that would normally be handed out at the beginning of the class.

Goals

After careful study of the course, an interested learner should be able to:

1. Identify the importance of the Accounting Equation;
2. Identify the Normal Balance for both Balance Sheet and Income Statement Accounts;
3. Analyse Business Transactions using T-Accounts;
4. Identify the basic information to be conveyed in the four basic Business Statements;
5. Understand and Perform the 7 steps of the Accounting Cycle
6. Record end of period Adjusting and Closing Entries
7. Use the basic form for reconciling bank statements

Financial Accounting/Session 1

Accounting: Accounting is the art of interpreting, measuring and communicating the results of economic activites.
The Accounting Equation;

Assets = Liabilities + Owner's Equity

The resources owned by a business are its assets e.g. cash, land, buildings and inventory. The rights or claims to the properties, in other words the rights of the creditors or the debts are the liabilities. The rights of the owners are called the owner's equity.
All business transactions can be stated in terms of changes in the elements of the accounting equation. One useful way to think about the accounting equation is that the left side (assets), "is what you have" and the right side (liabilities + owner's equity) "is how you got it". That is, you have buildings, cash, and inventory and you got it by selling (retained earnings), borrowing (liabilities), raising capital (stock offerings/contributed capital).
The Accounting equation can be re-arranged in the following ways:

Assets - Liabilities = Owner's Equity

Assets - Owner's Equity = Liabilities

The resources owned by a business are its assets e.g. cash, land, buildings and inventory. The rights or claims to the properties, in other words the rights of the creditors or the debts are the liabilities. The rights of the owners are called the owner's equity.
All business transactions can be stated in terms of changes in the elements of the accounting equation. One useful way to think about the accounting equation is that the left side (assets), "is what you have" and the right side (liabilities + owner's equity) "is how you got it". That is, you have buildings, cash, and inventory and you got it by selling (retained earnings), borrowing (liabilities), raising capital (stock offerings/contributed capital).
The Accounting equation can be re-arranged in the following ways:
Assets - Liabilities = Owner's Equity Assets - Owner's Equity = Liabilities Now just to give an example lets pick up a simple transaction. John Doe has 1000 dollars and goes out to buy a car. The car he picked was 10,000 dollars. He went to the bank and took out a 9000 dollar loan and paid for the car. Now lets see what is going on from John's side. He has a car that is worth 10,000 dollars, which is an asset in his books. However, he has a 9000 dollar loan which he has to pay off. That is a debt, and John has to pay it off to the bank. This is a liability in John's books. The 1000 dollars that John paid from his pocket towards the car created an equity in John's books. The equity is the part which is in essence owned by John. If you think, theoretically John only owns 1/10th of the car, since he paid only 1000 dollars of a 10,000 dollar value. The rest is still owned by the bank. As John pays off the debt to the bank, his liability will decrease and thus creating (increasing) his equity.
So, the accounting equation balances out as follows:
10,000 Asset = 9,000 Liability + 1,000 Equity
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So, the accounting equation balances out as follows:
10,000 Asset = 9,000 Liability + 1,000 Equity
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Debits/Credits Rule This rule is based on the behaviour of accounts.
When a financial transaction is recorded, the Debits (Dr) and Credits (Cr) need to balance in order to keep the accounts in balance.
An easy rule to remember is, "Debit the Asset that Increases"
For example, if you want to practice accounting for cooking a simple breakfast, you might proceed as follows:

• Dr the frying pan 2 egg yolks
• Dr the frying pan 2 egg whites
• Dr the trash basket 2 egg shells
  • Cr the carton of eggs 2 whole eggs

To record breaking the eggs and putting the eggs in the frying pan
In this transaction, an asset, (the egg) is split into parts and some of the asset goes in the pan and some in the trash. A Debit (Dr) is used to show that the assets in the pan and the trash both increase. A balancing Credit (Cr) is used to show that the amount of assets (whole eggs) in the egg carton has decreased.
This transaction is in balance because the total Credits equal the total Debits. Everything that is covered by the Debits (yolk, white and shell) is also covered by the Credits (one whole egg)
Of course if you:

• Debit the asset that increases

Then logically you would:

• Credit the asset that decreases
• Credit the liability or owners equity that increases
• Debit the liability or owners equity that decreases

A popular acronym to help accounting students to remember what to do when an account INCREASES is DEAD CURLS. It's silly, but it helps:

D - Debit INCREASES in E - Expenses A - Assets D - Dividends
C - Credit INCREASES in U - Unearned Revenue (Sometimes the 'U' will just be blank as a filler, because Unearned Revenue is technically a liability) R - Revenue L - Liabilities S - Stockholder/Owner's Equity
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More about Debits
An elderly accountant had just retired. The boss was cleaning out his desk. Taped to the center of the top middle drawer was a piece of paper with the words:

• Debits go on the Window side

--221.120.250.79 11:14, 8 August 2010 (UTC)