Instructor and Course Overview

Instructor Background

• Professional Path: The instructor transitioned from retail to accounting for career stability, completed CPA requirements, and now teaches full-time.

• Teaching Philosophy: Emphasizes universal accounting concepts, practical career advice, and the value of education as an investment in human capital.

Course Structure and Expectations

• Course Focus: Foundational financial accounting concepts over a 16-17 week semester.

• Assessment: Homework, quizzes, and exams are administered via Access/Pearson; exams are open book/notes.

• Textbook: E-text provided via Canvas for affordability.

• Class Format: Lectures followed by Q&A attendance is flexible.

Chapter 1 Recap: The Financial Statements

Main Financial Statements

Financial accounting relies on four primary statements to communicate a company's financial position and performance:

• Income Statement: Reports revenues and expenses over a period, showing net income or net loss.

• Balance Sheet: Presents assets, liabilities, and equity at a specific point in time. The fundamental equation is:

• Statement of Retained Earnings (or Stockholders' Equity): Tracks changes in retained earnings, reflecting accumulated profits minus dividends.

• Statement of Cash Flows: Summarizes cash inflows and outflows (covered in later courses).

Key Components of the Balance Sheet

• Current Assets: Expected to be used or converted to cash within one year (e.g., cash, prepaid expenses, inventory, accounts receivable).

• Long-Term Assets: Include land, buildings, equipment (subject to depreciation), and intangibles (goodwill, patents, copyrights).

• Liabilities:

  • Current: Due within one year (e.g., accounts payable).

  • Long-term: Due beyond one year (e.g., bonds, notes payable).

• Equity:

  • Contributed/Paid-in Capital: Funds invested by shareholders (common stock).

  • Retained Earnings: Cumulative profits retained in the business.

  • Treasury Stock: Shares repurchased by the company, reducing outstanding shares and potentially signaling management confidence.

Accounting Equation Example

• Example: If a company has $100,000 in assets and $60,000 in liabilities, equity is $40,000.

GAAP, IFRS, and Core Accounting Concepts

Accounting Standards

• GAAP (Generally Accepted Accounting Principles): U.S. standards set by the Financial Accounting Standards Board (FASB).

• IFRS (International Financial Reporting Standards): Global standards set by the International Accounting Standards Board (IASB).

• Overlap and Differences: Most principles are similar, but some differences exist; multinational companies may need to understand both.

Objectives and Principles

• Main Objective: Provide useful, relevant, and reliable financial information for decision-making.

• Materiality: Significance of an amount; material items can influence decisions.

• Key Assumptions:

  • Entity Assumption: Business is separate from its owners.

  • Going Concern: Assumes the business will continue operating.

  • Historical Cost Principle: Assets recorded at original purchase price.

  • Stable Monetary Unit: Assumes manageable inflation (e.g., U.S. Federal Reserve targets 2%).

• Oversight: Public companies' financial statements are audited by independent CPAs as required by the SEC.

Accrual Accounting and Retained Earnings

Accrual vs. Cash Basis

• Accrual Basis: Revenue is recognized when earned, and expenses when incurred, regardless of cash flow.

• Cash Basis: Revenue and expenses recognized only when cash is exchanged (used in the statement of cash flows).

Retained Earnings and Dividends

• Dividends: Distributions to shareholders, not classified as expenses; can be paid from prior retained earnings even in loss years.

• Retained Earnings Formula:

The Accounting Cycle Overview

Seven-Step Accounting Cycle

The accounting cycle is a systematic process completed each period to produce accurate financial statements:

1. Transaction Analysis

2. Journalizing (recording in the general journal)

3. Posting to the General Ledger

4. Trial Balance Preparation

5. Adjusted Trial Balance

6. Financial Statement Preparation

7. Closing the Books

Chapter 2 focuses on steps 1–4; the full cycle is covered throughout the course.

Debits, Credits, and Normal Balances

Double-Entry System

• Debits: Left side of an account; increase assets and expense accounts.

• Credits: Right side of an account; increase liabilities, equity, and revenue accounts.

• Normal Balances:

  • Assets: Debit

  • Liabilities: Credit

  • Equity: Credit (except expenses and dividends, which increase with debits)

• Journal Entry Format: Date, debit account(s), credit account(s), and brief description; debits must always equal credits.

Example Journal Entries

• Purchase on Account (Aug. 3):

  • Debit: Supplies $500, Equipment $11,800

  • Credit: Accounts Payable $12,300

• Services Performed on Account (Aug. 11):

  • Debit: Accounts Receivable $3,300

  • Credit: Service Revenue $3,300

• Partial Cash Collection (Aug. 18):

  • Debit: Cash $1,200

  • Credit: Accounts Receivable $1,200

Trial Balance and Common Errors

Trial Balance Purpose

• Trial Balance: Lists all account balances; total debits must equal total credits.

• Limitations: Balanced totals do not guarantee accuracy; errors may still exist.

Common Errors

• Slide Error: Incorrect magnitude (e.g., $50,000 entered as $5,000 on both sides).

• Transposition Error: Digits reversed (e.g., $52,000 recorded as $25,000).

Adjusting Entries

• Correct items not yet journalized (e.g., accrued interest payable).

• Common liability abbreviations: AP (Accounts Payable), IP (Interest Payable), WP (Wages Payable), SP (Salaries Payable), NP (Notes Payable).

• Depreciation: Allocation of a long-term asset's cost over its useful life.

ESG, Tools, and Career Guidance

Ethics and Professional Development

• Three Ps Framework: Profits, People, Planet—business decisions should balance financial, social, and environmental considerations.

• CPA Continuing Education: 120 hours of Continuing Professional Education (CPE) every three years, including ethics.

• Career Paths: CPA, CMA, forensic accounting, investments, cybersecurity, data analytics, AI-related roles.

• Key Skills: Excel, writing, data analytics, presentation skills.

Appendix: Table of Normal Account Balances

Additional info: Table reconstructed for clarity based on standard accounting conventions.