Financial Accounting I: Key Concepts and Applications

Accounting I Final Exam Study Notes

Introduction

This study guide summarizes essential topics in Financial Accounting, focusing on the recording of transactions, adjusting entries, inventory systems, financial statement preparation, bank reconciliation, and internal controls. These concepts are foundational for understanding how businesses track and report their financial activities.

Rules of Debit and Credit

Tracking Transactions in Accounts

• Accounts are used to record transactions and are typically presented in a "T-account" format, which separates debits (left side) and credits (right side).

• Each transaction affects at least two accounts, maintaining the accounting equation's balance.

Example: When a company purchases supplies for cash, Supplies (an asset) is debited, and Cash (an asset) is credited.

Account Format

Account Name	Left side (debit)	Right side (credit)
Cash	Increase	Decrease
Accounts Payable	Decrease	Increase
Revenue	Decrease	Increase

Adjusting Entries

Purpose and Importance

• Adjusting entries are made at the end of the period to update accounts before preparing financial statements.

• They ensure revenues and expenses are recognized in the correct period (accrual accounting).

Categories of Adjusting Entries

Prepaid-type	Category of Adjusting Entry	Debited	Credited
Prepaid expense	Prepaid expense	Expense	Asset
Amortization	Amortization	Expense	Asset
Unearned revenue	Unearned revenue	Liability	Revenue
Accrued expense	Accrued expense	Expense	Liability
Accrued revenue	Accrued revenue	Asset	Revenue

Formula for Straight-Line Amortization:

$\text{Straight-line amortization expense} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life}}$

Inventory Systems

Perpetual Inventory System

• Tracks inventory and cost of goods sold continuously as transactions occur.

• Each purchase or sale is recorded immediately in the inventory account.

Example: When inventory is purchased for cash, Inventory is debited, and Cash is credited.

Net Sales Revenue Calculation

$\text{Net Sales Revenue} = \text{Sales Revenue} - \text{Sales Discounts} - \text{Sales Returns}$

Financial Statements for Merchandisers

• The income statement can be prepared in a single-step or multi-step format.

• Single-step format: All revenues minus all expenses.

• Multi-step format: Separates gross margin and operating income for more detail.

IFRS and Inventory

• IFRS (International Financial Reporting Standards) require revenue recognition when performance obligations are satisfied, making revenue recognition more precise and standardized.

Bank Reconciliation

Purpose and Journal Entries

• Bank reconciliation explains differences between the bank statement and the company's cash account.

• Adjustments are made for items such as deposits in transit, outstanding checks, and bank service charges.

Bank Reconciliation Formula:

$\text{Adjusted bank balance} = \text{Ending bank statement balance} + \text{Deposits in transit} - \text{Outstanding checks}$

$\text{Adjusted book balance} = \text{Ending cash balance} + \text{Interest earned} - \text{Bank service charge}$

Example Journal Entry for Petty Cash Replenishment

Account	Debit	Credit
Office Supplies	200
Delivery Expense	100
Cash		300
Cash short & over		short/over

Internal Controls

Petty Cash Controls

• Designate a responsible employee as custodian of the petty cash fund.

• Keep petty cash in a secure location.

• Support all payments with petty cash tickets or vouchers.

• Perform unannounced checks or audits to verify the fund balance.

Components of Internal Control (CRIME)

• Control procedures

• Risk assessment

• Information systems

• Monitoring of controls

• Environment

Internal control procedures include audits, proper authorization, and the use of electronic devices and computer controls.