Basics of Accounting

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Accounting Information and the Accounting Cycle > Basics of Accounting
Basics of Accounting
Terminology of Accounting
Debits and Credits
Fundamental Accounting Equation
An Expanded Equation
Types of Transactions
www.boundless.com/accounting
Terminology of Accounting
The cash basis of accounting records revenue when cash is received and
expenses when they are paid in cash.
The accrual method records income items when they are earned and records
deductions when expenses are incurred, regardless of the flow of cash.
Assets are economic resources.Anything capable of being owned or controlled to
produce value is considered an asset.
A liability is an obligation of an entity arising from past transactions, the
settlement of which may result in the transfer of assets, provision of services, or
other yielding of economic benefits in the future.
Equity is the residual claim or interest of the most junior class of investors in
assets after all liabilities are paid.
Assets and liabilities
View on Boundless.com
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/accounting-information-and-the-accounting-cycle-2/basics-of-accounting
-22/terminology-of-accounting-136-3751
Debits and Credits

The English words credit and debit come from the Latin words credre and
debere, respectively.Credre means "to entrust," and debere means "to owe".
In financial accounting or bookkeeping, "Dr" (Debit) indicates the left side of a
ledger account and "Cr" (Credit) indicates the right.
The rule that total debits equal total credits applies when all accounts are totaled.
An increase (+) to an asset account is a debit.An increase (+) to a liability
account is a credit.
Conversely, a decrease (-) to an asset account is a credit.A decrease (-) to a
liability account is a debit.
It is important for us to consider perspective when attempting to understand the
concepts of debits and credits.
Debit and credit rules
-22/debits-and-credits-137-3752
Fundamental Accounting Equation

The accounting equation displays that all assets are either financed by borrowing
money or paying with the money of the company's shareholders.
The balance sheet is a complex display of this equation, showing that the total
assets of a company are equal to the total of liabilities and shareholder
equity.Any purchase or sale has an equal effect on both sides of the equation or
offsetting effects on the same side of the equation.
A mark in the credit column will increase a company's liability, income, and capital
accounts but decrease its asset and expense accounts.A mark in the debit
column will increase a company's asset and expense accounts, but decrease its
liability, income, and capital account.
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/accounting-information-and-the-accounting-cycle-2/basics-of-accountin
g-22/fundamental-accounting-equation-138-4502
An Expanded Equation
The purpose of financial statements are to provide both business insiders and
outsiders a concise, clear picture of the current financial status in the
business.Therefore, the people who use the statements must be confident in its
accuracy.
Closing the books is simply a matter of ensuring that transactions that take place
after the business's financial period are not included in the financial statements.
Adjusting entries are generally made in relation to prepaid expenses,
prepayments, accruals, estimates and inventory.
When an audit is completed, the auditor will issue a report regarding whether the
statements are accurate.To ensure a positive reports, some companies try to
participate in opinion shopping.This practice is generally prohibited..
The Balance Sheet
www.boundless.com/accounting/textbooks/boundless-accounting-textbook/accounting-information-and-the-accounting-cycle-2/basics-of-accountin
g-22/an-expanded-equation-139-8439
Types of Transactions
Sales - A sale is a transfer of property for money or credit.Revenue is earned
when goods are delivered or services are rendered.In double-entry bookkeeping,
a sale of merchandise is recorded in the general journal as a debit to cash or
accounts receivable and a credit to the sales account.
Purchase transactions results in a decrease in the finances of the purchaser and
an increase in the benefits of the sellers.Purchases can be made by cash or
credit.As credit purchases are made, accounts payable will increase.
Receipts refer to a business getting paid by another business for delivering goods
or services.This transaction results in a decrease in accounts receivable and an
increase in cash/ cash or equivalents.
Payments refer to a business paying to another business for receiving goods or
services.This transaction results in a decrease in accounts payable and an
decrease in cash/ cash or equivalents.
Bookkeeping
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Appendix
Accounting Information and the Accounting Cycle
Key terms
adjusting entry Journal entries usually made at the end of an accounting period to allocate income and expenditure to the
period in which they actually occurred.
audit An independent review and examination of records and activities to assess the adequacy of system controls, to ensure
compliance with established policies and operational procedures, and to recommend necessary changes in controls, policies,
or procedures
credit an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease
asset and expense accounts
credit an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease
asset and expense accounts
debit an entry in the left hand column of an account to record a debt; debits increase asset and expense accounts and
decrease liability, income, and equity accounts
debit an entry in the left hand column of an account to record a debt; debits increase asset and expense accounts and
decrease liability, income, and equity accounts
double-entry bookkeeping A double-entry bookkeeping system is a set of rules for recording financial information in a financial
accounting system in which every transaction or event changes at least two different nominal ledger accounts.
double-entry bookkeeping system A double-entry bookkeeping system is a set of rules for recording financial information in a
financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.
double-entry bookkeeping system A double-entry bookkeeping system is a set of rules for recording financial information in a
financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.
intangible assets non-monetary assets that cannot be seen, touched or physically measured, are created through time and
effort, and are identifiable as a separate asset
opinion shopping The process of contracting or rejecting auditors based on the type of opinion report they will issue on the
auditee.
Bookkeeping
Purchases and sales in an old ledger
Flickr. "All sizes | Old Ledger | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/tjc/6454659319/sizes/z/in/photostream/ View on Boundless.com
Assets and liabilities

Differences between assets and liabilities
Wikimedia. "Difference between assets and liabilities." CC BY-SA http://commons.wikimedia.org/wiki/File:Difference_between_assets_and_liabilities.jpg

Wikipedia. "Debit." GNU FDL http://en.wikipedia.org/wiki/Debit View on Boundless.com
Example 2
July financial statements for Highland Yoga
Google. CC BY-SA
https://docs.google.com/viewer?a=v&pid=gmail&attid=0.4&thid=13c69c043341f989&mt=application/vnd.openxmlformats-officedocument.wordprocessing
Example 1
Pre-opening financial statements for Highland Yoga.
Google. CC BY-SA
Example 3
August financial statements for Highland Yoga
Google. CC BY-SA
The Balance Sheet

If an error is found on a previous year's financial statement, a correction must be made and the financials reissued.
Flickr. "All sizes | y2cary3n6mng-q6hnvf-balance-sheet | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/sampjb/7690684984/sizes/m/
Revenue is recorded when the sale is made in what method of

accounting?
A) accrual basis method
B) cash-basis method
C) financial based method
D) revenue based method
Revenue is recorded when the sale is made in what method of

accounting?
A) accrual basis method
B) cash-basis method
C) financial based method
D) revenue based method
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
What is the definition of an asset?
A) A residual claim or interest
B) An obligation arising from a past transaction
C) A piece of machinery
D) Anything capable of being owned or controlled to produce value
What is the definition of an asset?
A) A residual claim or interest
B) An obligation arising from a past transaction
C) A piece of machinery
D) Anything capable of being owned or controlled to produce value
What are the two major asset classes?
A) real and unreal
B) monetary and non-monetary
C) tangible and intangible
D) cash and receivables
What are the two major asset classes?
A) real and unreal
B) monetary and non-monetary
C) tangible and intangible
D) cash and receivables
In a double entry bookkeeping system every debit transaction

must have?
A) an entry on the left side of the journal
B) a corresponding credit transaction
C) a notation in the journal
D) A reversing entry
In a double entry bookkeeping system every debit transaction

must have?
A) an entry on the left side of the journal
B) a corresponding credit transaction
C) a notation in the journal
D) A reversing entry
In bookkeeping, what does the word credit indicate?
A) the right side of the ledger
B) the left side of the ledger
C) a liability account
D) a revenue account
In bookkeeping, what does the word credit indicate?
A) the right side of the ledger
B) the left side of the ledger
C) a liability account
D) a revenue account
An asset account is increased by making what type of entry?
A) a debit entry
B) a credit entry
C) a left side entry
D) a journal entry
An asset account is increased by making what type of entry?
A) a debit entry
B) a credit entry
C) a left side entry
D) a journal entry
What are the two columns in a double entry system?
A) Debit and Credit
B) Left and Right
C) Asset and Liability
D) Revenue and Expense
What are the two columns in a double entry system?
A) Debit and Credit
B) Left and Right
C) Asset and Liability
D) Revenue and Expense
What do we mean when we say that a double-entry bookkeeping

entry must be in balance?
A) There must be one debit and one credit.
B) Total debits must equal total credits.

C) There must be one entry in the left column and one entry in the right
column.
D) There must be an increase to an asset account and a decrease to a
liability account.
What do we mean when we say that a double-entry bookkeeping

entry must be in balance?
A) There must be one debit and one credit.
B) Total debits must equal total credits.

C) There must be one entry in the left column and one entry in the right
column.
D) There must be an increase to an asset account and a decrease to a
liability account.
If a business borrows money from a bank, how is this transaction

reflected in the accounting equation?
A) Increase an asset and increase an expense
B) Increase an asset and increase a liability
C) Increase an asset and decrease an asset
D) Increase an expense and decrease a liability
If a business borrows money from a bank, how is this transaction

reflected in the accounting equation?
A) Increase an asset and increase an expense
B) Increase an asset and increase a liability
C) Increase an asset and decrease an asset
D) Increase an expense and decrease a liability
Saylor OER. "Business Administration Saylor.org Free Online Courses Built by Professors."
CC BY 3.0 http://www.saylor.org/majors/Business/
If total liabilities decrease by $25,000 and owners equity

increases by $10,000 during a specific accounting period, then
assets must have:
A) increased by $15,000
B) increased by $35,000
C) decreased by $15,000
D) decreased by $35,000
If total liabilities decrease by $25,000 and owners equity

increases by $10,000 during a specific accounting period, then
assets must have:
A) increased by $15,000
B) increased by $35,000
C) decreased by $15,000
D) decreased by $35,000
Saylor OER. "Business Administration Saylor.org Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/
Which of the following is a matter of ensuring that transactions

that take place after the business's financial period are not
included in the financial statements?
A) adjusting entries
B) translating the adjusted trial balance
C) closing the books
D) preparing financial statements
Which of the following is a matter of ensuring that transactions

that take place after the business's financial period are not
included in the financial statements?
A) adjusting entries
B) translating the adjusted trial balance
C) closing the books
Which of the following occurs at the end of an accounting period

in order to allocate income and expenditure to the appropriate
year?
A) closing the books
B) adjusting entry
C) translating the adjusted trial balance
Which of the following occurs at the end of an accounting period

in order to allocate income and expenditure to the appropriate
year?
A) closing the books
B) adjusting entry
C) translating the adjusted trial balance
Which of the following is NOT one of the four main financial

statements?
A) the adjusted trial balance
B) the balance sheet
C) the income statement
D) the statement of cash flows
Which of the following is NOT one of the four main financial

statements?
A) the adjusted trial balance
B) the balance sheet
C) the income statement
D) the statement of cash flows
If a business makes a purchase on credit what account is

increased?
A) Accounts Payable
B) Sales
C) Accounts Receivable
D) Purchases
If a business makes a purchase on credit what account is

increased?
A) Accounts Payable
B) Sales
C) Accounts Receivable
D) Purchases
Receiving payment for goods or services increases the cash

account and decreases this account:
A) Accounts Payable
B) Sales
C) Purchases
D) Accounts receivable
Receiving payment for goods or services increases the cash

account and decreases this account:
A) Accounts Payable
B) Sales
C) Purchases
D) Accounts receivable
How are sales recorded in the general journal.
A) As a credit to the cash account and a debit to the sales account
B) As a debit to the cash account and a credit to accounts receivable

C) As a credit to the sales account and a debit to the cash
account/accounts receivable
D) As a credit to sales and a debit to revenue
How are sales recorded in the general journal.
A) As a credit to the cash account and a debit to the sales account
B) As a debit to the cash account and a credit to accounts receivable

C) As a credit to the sales account and a debit to the cash
account/accounts receivable
D) As a credit to sales and a debit to revenue
Attribution
Wikipedia. "Sales (accounting)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sales_(accounting)
Wikipedia. "Purchase." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Purchase
Wikipedia. "double-entry bookkeeping." CC BY-SA 3.0 http://en.wikipedia.org/wiki/double-entry%20bookkeeping
Wikipedia. "Equity (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Equity_(finance)
Wikipedia. "Liabilities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Liabilities
Wikipedia. "Assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Assets
Wikipedia. "Cash-basis versus accrual-basis accounting." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Cash-basis_versus_accrual-basis_accounting
Wikipedia. "intangible assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/intangible%20assets
Wikipedia. "Accruals." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accruals
Wikipedia. "Cash method of accounting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_method_of_accounting
Connexions. "Debits and Credits - Accounting." CC BY 3.0 http://cnx.org/content/m20547/latest/
Wikipedia. "Debit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Debit
Wikipedia. "double-entry bookkeeping system." CC BY-SA 3.0
http://en.wikipedia.org/wiki/double-entry%20bookkeeping%20system
Wikipedia. "credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/credit
Wikipedia. "debit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/debit
Wikipedia. "debit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/debit
Wikipedia. "credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/credit
Wikipedia. "double-entry bookkeeping system." CC BY-SA 3.0

http://en.wikipedia.org/wiki/double-entry%20bookkeeping%20system
Wikipedia. "Accounting equation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounting_equation
Wikibooks. "Accountancy/Principles of Accounting." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Accountancy/Principles_of_Accounting
Wikipedia. "Auditor's report." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Auditor%2527s_report
Dropbox. CC BY http://dl.dropbox.com/u/31779972/Accounting%2520Principles%2520Vol.%25201.pdf
Wikipedia. "Adjusting entries." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Adjusting_entries
Wikipedia. "Financial statements." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_statements
Wiktionary. "audit." CC BY-SA 3.0 http://en.wiktionary.org/wiki/audit
Wikipedia. "opinion shopping." CC BY-SA 3.0 http://en.wikipedia.org/wiki/opinion%20shopping
Wikipedia. "adjusting entry." CC BY-SA 3.0 http://en.wikipedia.org/wiki/adjusting%20entry

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Accounting Information and the Accounting Cycle > Basics of Accounting

Accounting Information and the Accounting Cycle > Basics of Accounting

Accounting Information and the Accounting Cycle > Basics of Accounting

Debits and Credits

Accounting Information and the Accounting Cycle > Basics of Accounting

Fundamental Accounting Equation

Accounting Information and the Accounting Cycle > Basics of Accounting

Accounting Information and the Accounting Cycle > Basics of Accounting

Accounting Information and the Accounting Cycle

Accounting Information and the Accounting Cycle

Accounting Information and the Accounting Cycle

Assets and liabilities

Accounting Information and the Accounting Cycle

Debit and credit rules

Accounting Information and the Accounting Cycle

Accounting Information and the Accounting Cycle

Accounting Information and the Accounting Cycle

Accounting Information and the Accounting Cycle

The Balance Sheet

Accounting Information and the Accounting Cycle

Revenue is recorded when the sale is made in what method of

C) financial based method

D) revenue based method

Accounting Information and the Accounting Cycle

Revenue is recorded when the sale is made in what method of

C) financial based method

D) revenue based method

Accounting Information and the Accounting Cycle

What is the definition of an asset?

A) A residual claim or interest

B) An obligation arising from a past transaction

D) Anything capable of being owned or controlled to produce value

Accounting Information and the Accounting Cycle

What is the definition of an asset?

A) A residual claim or interest

B) An obligation arising from a past transaction

D) Anything capable of being owned or controlled to produce value

Accounting Information and the Accounting Cycle

What are the two major asset classes?

A) real and unreal

B) monetary and non-monetary

C) tangible and intangible

D) cash and receivables

Accounting Information and the Accounting Cycle

What are the two major asset classes?

A) real and unreal

B) monetary and non-monetary

C) tangible and intangible

D) cash and receivables

Accounting Information and the Accounting Cycle

In a double entry bookkeeping system every debit transaction

B) a corresponding credit transaction

C) a notation in the journal

Accounting Information and the Accounting Cycle

In a double entry bookkeeping system every debit transaction

B) a corresponding credit transaction

C) a notation in the journal

Accounting Information and the Accounting Cycle