Financial Accounting Notes

Dedication

I dedicate this
effort to my
Parents & Teachers
who Guide
&
Encourage me
during the
preparation of Notes

Prepared by

MUHAMMAD MUSTAFA

MBA FROM UOS

For Further Notes

Contact no 03457963314

Email Address [email protected]

 SUMMARY OF ACCOUNTING BASICS

Classification of Accounts

Account Account Normal Financial

Title Classification Balance Statement
Accounts Payable Current liability Credit Balance sheet
Accounts Receivable Current asset Debit Balance sheet
Accumulated Depreciation Plant asset Credit Balance sheet
Accumulated Depletion Plant asset Credit Balance sheet
Advertising Expense Operating expense Debit Income statement
Allowance for Doubtful Accounts Current asset Credit Balance sheet
Amortization Expense Operating expense Debit Income statement
Appropriation for __________ Stockholders’ equity Credit Retained earnings statement/
Balance sheet
Bonds Payable Long-term liability Credit Balance sheet
Building Plant asset Debit Balance sheet
Capital Stock Stockholders’ equity Credit Balance sheet
Cash Current asset Debit Balance sheet
Cash Dividends Stockholders’ equity Debit Retained earnings statement
Cash Dividends payable Current liability Credit Balance sheet
Common Stock Stockholders’ equity Credit Balance sheet
Cost of Merchandise (Goods) Cost of merchandise Debit Income statement
Sold (goods sold)
Deferred Income Tax Current liability/Long- Credit Balance sheet
term liability
Depletion Expense Operating expense Debit Income statement
Discount on Bonds Payable Long-term liability Debit Balance sheet
Discounts Lost Other expense Debit Income statement
Dividend Income Other income Credit Income statement
Dividends Stockholders’ equity Debit Retained earnings statement
Donated Capital Stockholders’ equity Credit Balance sheet
Employees Federal Income Tax Current liability Credit Balance sheet
Payable
Equipment Plant asset Debit Balance sheet
Exchange Gain Other income Credit Income statement
Exchange Loss Other expense Debit Income statement
Factory Overhead (Overapplied) Deferred credit Credit Balance sheet (interim)
Factory Overhead (Underapplied) Deferred debit Debit Balance sheet (interim
Federal Income Tax Payable Current liability Credit Balance sheet
Federal Unemployment Tax Current liability Credit Balance sheet
Payable
FICA Tax Payable Current liability Credit Balance sheet
Finished Goods Current asset Debit Balance sheet
Gain on Disposal of Plant Assets Other income Credit Income statement
Gain on Redemption of Bonds Extraordinary item Credit Income statement
Gain on Sale of Investments Other income Credit Income statement
Goodwill Intangible asset Debit Balance sheet
Income Tax Income tax Debit Income statement
Income Tax Payable Current liability Credit Balance sheet
Insurance Expense Operating expense Debit Income statement
Interest Expense Other expense Debit Income statement
Interest Income Other income Credit Income statement
Interest Receivable Current asset Debit Balance sheet
Investment in Bonds Investment Debit Balance sheet
Investment in Stocks Investment Debit Balance sheet
Investment in Subsidiary Investment Debit Balance sheet
Land Plant asset Debit Balance sheet
Loss on Disposal of Plant Assets Other expense Debit Income statement
Loss on Redemption Bonds Extraordinary item Debit Income statement
Loss on Sale of Investments Other expense Debit Income statement
Marketable Securities Current asset Debit Balance sheet
Account Account Normal Financial
Title Classification Balance Statement
Materials Current asset Debit Balance sheet
Merchandise Inventory Current asset/Cost of Debit Balance sheet/Income
merchandise sold statement
Notes Payable Current liability/Long- Credit Balance sheet
term liability
Notes Receivable Current asset/Investment Debit Balance sheet
Organization Costs Intangible asset Debit Balance sheet
Patents Intangible asset Debit Balance sheet
Paid-in Capital from Sale of Stockholders’ equity Credit Balance sheet
Treasury Stock
Paid-in Capital in Excess of Stockholders’ equity Credit Balance sheet
Par (Stated Value)
Payroll Tax Expense Operating expense Debit Income statement
Pension Expense Operating expense Debit Income statement
Petty cash Current asset Debit Balance sheet
Premium on Bonds Payable Long-term liability Credit Balance sheet
Prepaid Insurance Current asset Debit Balance sheet
Prepaid Rent Current asset Debit Balance sheet
Preferred Stock Stockholders’ equity Credit Balance sheet
Purchases Cost of merchandise Debit Income statement
sold
Purchases Discounts Cost of merchandise Credit Income statement
sold
Purchases Returns and Cost of merchandise Credit Income statement
Allowances sold
Rent Expense Operating expense Debit Income statement
Rent Income Other income Credit Income statement
Retained Earnings Stockholders’ equity Credit Balance sheet/Retained
earnings statement
Salaries Expense Operating expense Debit Income statement
Salaries Payable Current liability Credit Balance sheet
Sales Revenue from sales Credit Income statement
Sales Discounts Revenue from sales Debit Income statement
Sales Returns and Allowances Revenue from sales Debit Income statement
Sales Tax Payable Current liability Credit Balance sheet
Sinking Fund Cash Investment Debit Balance sheet
Sinking Fund Investments Investment Debit Balance sheet
State Unemployment Tax Payable Current liability Credit Balance sheet
Stock Dividends Stockholders’ equity Debit Retained earnings statement
Stock Dividends Distributable Stockholders’ equity Credit Balance sheet
Supplies Current asset Debit Balance sheet
Supplies Expense Operating expense Debit Income statement
Transportation In Cost of merchandise Debit Income statement
sold
Treasury Stock Stockholders’ equity Debit Balance sheet
Uncollectible Accounts Expense Operating expense Debit Income statement
Unearned Rent Current liability Credit Balance sheet
Utilities Expense Operating expense Debit Income statement
Vacation Pay Expenses Operating expense Debit Income statement
Vacation Pay Payable Current liability/long- Credit Balance sheet
term liability
Work In Process Current asset Debit Balance sheet
The Basics A list of the assets, liabilities, and owner’s equity of a
business entity as of a specific date, usually at the close of
1. Accounting Equation: the last day of a month or a year.
Assets = Liabilities + Owner’s Equity

2. T Account:

Account Title
STATEMENT OF CASH FLOWS
Left Side Right Side
A summary of the cash receipts and cash payments of a
debit credit
business entity for a specific period of time, such as a
month or a year.
3. Rules of Debit and Credit:
6. Accounting Cycle:
Balance Sheet Accounts 1. Analyze and record transactions in journal.
ASSETS LIABILITIES 2. Post transactions to ledger.
Asset Accounts Liability Accounts 3. Prepare trial balance, assemble adjustment data, and
Debit Credit Debit Credit complete worksheet.
for for for for 4. Prepare financial statements.
increases decreases decreases increases 5. Journalize and post adjusting entries.
6. Journalize and post closing entries.
OWNER’S EQUITY 7. Prepare post-closing trial balance.
Owner’s Equity Accounts
Debit Credit 7. Types of Adjusting Entries:
for for 1. Deferred expense (prepaid expense)
decreases increases 2. Deferred revenue (unearned revenue)
3. Accrued expense (accrued liability)
Income Statement Accounts 4. Accrued revenue (accrued asset)
Debit for Credit for 5. Depreciation expense
decreases in owner’s equity increases in owner’s equity
Each entry will always affect both a balance sheet and an
Expense Accounts Revenue Accounts income statement account.
Debit Credit Debit Credit
for for for for 8. Closing Entries:
increases decreases decreases increases 1. Transfer revenue account balances to Income
Summary.
Normal Balance 2. Transfer expense account balances to Income
Summary.
4. To Analyze a Transaction: 3. Transfer Income Summary balance to Retained
1. Determine whether an asset, a liability, owner’s Earnings.
equality, revenue, or expense account is affected by 4. Transfer dividends account balance to Retained
the transaction. Earnings.
2. For each account affected by the transaction,
determine whether the account increases or 9. Special Journals
decreases. Rendering of services
3. Determine whether each increase or decrease should on account  recorded in  Revenue (sales) journal
be recorded as a debit or a credit. Receipt of cash from
any source  recorded in  Cash receipts journal
5. Financial Statements: Purchasing of items
on account  recorded in  Purchases journal
INCOME STATEMENT Payments of cash for
A summary of the revenue and the expense of a business any purpose  recorded in  Cash payments journal
entity for a specific period of time, such as a month or a
year. 10. Shipping Terms
FOB Shipping FOB
RETAINED EARNINGS STATEMENT Point Destination
A summary of the changes in the earnings retained in a Ownership (title)
business entity for a specific period of time, such as a passes to buyer when
month or a year. merchandise is ……. delivered to freight delivered to
carrier buyer
BALANCE SHEET
Transportation costs
are paid by: buyer seller
 premium…………………………… $xx
Increases in current assets (receivables,
inventories, prepaid expenses)……... xx
Decreases in current liabilities (accounts
and notes payable, accrued liabilities).. xx
Gains on disposal of assets and
retirement of debt…………………….. xx xx
Net cash flow from operating activities……….. $xx

11. Format for Bank Reconciliation: 16. Contribution Margin Ratio = Sales-Variable Costs
Sales
Cash balance according to bank statement…. $xxx
Add: Additions by depositor not on bank 17. Break-Even Sales (Units) = Fixed Costs_______
statement……………………… $xx Unit Contribution Margin
Bank errors………………………………... xx xx
$xxx 18. Sales (Units) = Fixed Costs + Target Profit
Deduct: Deductions by depositor not on Unit Contribution Margin
bank statement……………………. $xx
Bank errors………………………………. xx xx 19. Margin of Safety = Sales-Sales at Break-Even Point
Adjusted balance……………………………. $xxx Sales

Cash balance according to depositor’s records.. $xxx 20. Operating Leverage = Contribution Margin
Add: Additions by bank not recorded by Operating Income
depositor………………………………………. $xx
Depositor errors…………………………….. xx xx 21. Variances
$xxx
Deduct: Deductions by bank not recorded Direct Materials=Actual Price per Unit- x Actual Quantity
by depositor…………………………. $xx Price Variance Standard Price Used
Depositor errors…………………………….. xx xx
Adjusted balance……………………………… $xxx Direct Materials=Actual Quantity Used- x Standard Price
Quantity Variance Standard Rate per unit
12. Inventory Costing Methods
1. First-in, First-out (fifo)
Direct Labor = Actual Rate Per Hour – x Actual Hours
2. Last-in, First-out (lifo)
Rate Variance Standard Rate Worked
3. Average Cost
Direct Labor = Actual Hours Worked- x Standard Rate
13. Interest Computations: Time Variance Standard Hours per Hour
Interest = Face Amount (or Principal) x Rate x Time
Variable Factory Actual Budged Variable
14. Methods of Determining Annual Depreciation:
Overhead Controllable=Variable Factory - Factory
STRAIGHT-LINE: Cost-Estimated Residual Value
Variance Overhead Overhead for
Estimated Life
Actual Amount
Produced
DECLINING-BALANCE: Rate*xBook Value at
Beginning of Period
Fixed Factory 100% of Normal Std. Fixed
Overhead Volume = Capacity-Std. Capacity x Factory
*Rate is commonly twice the straight-line
Variance for Amount Produced Overhead
rate (1  Estimated Life).
Rate
15. Cash Provided by Operations on Statement of Cash
22. Rate of Return on = Controllable Operating Income
Flows (indirect method):
Investment (ROI) Invested Assets
Net income, per income statement……………. $xx
Alternative ROI Computation:
Add: Depreciation of plant assets…………….. $xx
Amortization of bond payable discount ROI = Controllable Operating Income x Sales____
and intangible assets…………………… xx Sales Invested Assets
Decreases in current assets (receivables,
inventories, prepaid expenses)………… xx 23. Capital Investment Analysis Methods:
Increases in current liabilities (accounts 1. Methods that Ignore Present Values:
and notes payable, accrued liabilities)… xx A. Average Rate of Return Method
Losses on disposal of assets and retirement B. Cash Payback Method
of debt………………………………….. xx xx 2. Methods That Use Present Values:
Deduct: Amortization of bond payable A. Net Present Value Method
 B. Internal Rate of Return Method

24. Average Rate = Estimated Average Annual Income

of Return Average Investment

25. Present Value Index =

Total Present Value of Net Cash Flow
Amount to be invested

26. Present Value Factor = Amount to Be Invested___

for an Annuity of $1 Equal Annual Net Cash Flows