Principles of Financial Accounting

The first accounting system was published in the year 1494 by a Venetion Monk.  The business terms he used are still used today.

Accounting is the language of business.

In this lecture, you will be able to identify the three types of businesses that you  have been dealing with.

In this lecture, you will be introduced to a number of accounting terms.

In this lecture we are introduced to the income statement and the statement of retained earnings. I would like you to think of the income statement as a report from the company on their operations for a particular period of time.

Some new terms

Profitability is the ability to generate income. Solvency is the ability to pay debts as they become due.

The financial statement that reflects a company’s profitability is the income statement.

The statement of retained earnings shows the change in retained earnings between the beginning and end of a period (e.g. a month or a year).

The balance sheet reflects a company’s solvency and financial position

In a previous section, I illustrated the income statement, statement of retained earnings, and balance sheet. These statements are the end products of the financial accounting process.

The raw data of accounting are business transactions.

You learned how to record transactions as increases or decreases in the assets, liabilities, and stockholders' equity items of the accounting equation. This procedure showed you how various transactions affected the accounting equation.

An account is a part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense.

To illustrate recording the increases and decreases in an account, texts use the T-account, which looks like a capital letter T. The name of the account, such as Cash, appears across the top of the T. We record increases on one side of the vertical line of the T and decreases on the other side.

Print off the sheet and follow in the video

Adjusting entries are journal entries made at the end of an accounting period or at any time financial statements are to be prepared to bring about a proper matching of revenues and expenses.

Adjusting entries fall into two broad classes: deferred (meaning to postpone or delay) items and accrued (meaning to grow or accumulate) items. Deferred items consist of adjusting entries involving data previously recorded in accounts. These entries involve the transfer of data already recorded in asset and liability accounts to expense and revenue accounts, respectively. Accrued items consist of adjusting entries relating to activity on which no data have been previously recorded in the accounts.

The work sheet is a columnar sheet of paper or a computer spreadsheet on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements. Usually, they save these work sheets to document the end-of-period entries. A work sheet is only an accounting tool and not part of the formal accounting records. Therefore, work sheets may vary in format; some are prepared in pencil so that errors can be corrected easily. Other work sheets are prepared on personal computers with spreadsheet software. Accountants prepare work sheets each time financial statements are needed—monthly, quarterly, or at the end of the accounting year.

In a previous  Section, you learned that revenue, expense, and dividends accounts are nominal (temporary) accounts that are merely subclassifications of a real (permanent) account, Retained Earnings. You also learned that we prepare financial statements for certain accounting periods. The closing process transfers (1) the balances in the revenue and expense accounts to a clearing account called Income Summary and then to Retained Earnings and (2) the balance in the Dividends account to the Retained Earnings account. The closing process reduces revenue, expense, and Dividends account balances to zero so they are ready to receive data for the next accounting period.

Accountants may perform the closing process monthly or annually. The Income Summary account is a clearing account used only at the end of an accounting period to summarize revenues and expenses for the period.

After this video I would like you to follow through with me a demonstration problem - Lopez Delivery. In the demo I will demonstrate the accounting cycle.

First print off the Demo problem, journal sheet and T accounts and try and journalise the transactions post to the T and come up with a trial balance. Then go through the videos Step1, Step 2&3 and Step 4 &5.