principles of accounting
principles of accounting

Ultimate Guide to Learn Principles of Accounting

This guide helps you learn principles of accounting. This is for students learning accounting and for anyone who wants to understand financial statements.

This guide shows all the topics in a principles of accounting textbook. It covers the accounting material from the following accounting courses:

  • financial accounting
  • managerial accounting
  • principles of accounting 1
  • principles of accounting 2
  • survey of accounting

Why study accounting?

The Harvard Business School article, Why Learn Accounting? 6 Benefits, lists the following benefits from learning accounting:

1. Manage your finances more effectively
2. Understand current events
3. Make more meaningful contributions at work
4. Prepare for entrepreneurial success
5. Receive more advancement opportunities
6. Improve decision-making capabilities

For Intermediate Accounting content, see The Ultimate Guide to Learn Intermediate Accounting

1 Introduction to Accounting

What is accounting?

Accounting is the process of recording, analyzing, and summarizing financial transactions. Accounting uses the five types of accounts to record all the transactions.

In accounting, the five types of accounts are:

  1. assets: resources owned by a business; what the company owns
  2. liabilities: debts of the company; what the company owes
  3. equity: claim on the assets by the owners; calculated as equity = assets – liabilities; equity is the net worth of the company
  4. revenues: when a business receives assets from selling products and services
  5. expenses: when a business uses or consumes assets to create revenues

The goal of financial accounting, or financial reporting, is to issue financial statements.

There are four financial statements that each company prepares. The four financial statements are:

  1. income statement: revenues minus expenses equal net income or net loss
  2. balance sheet: lists all the assets, liabilities, and equity of a company
  3. cash flow statement: cash inflows and cash outflows
  4. statement of owners’ equity: shows the changes in equity on the balance sheet

Introduction to accounting

2 Recording Business Transactions

Recording journal entries

Recording transactions in accounting uses a system called debits and credits. You need to learn the accounts and how to make journal entries into the accounts.

To record business transactions, use the debit and credit rules. All the transactions are recorded in a journal. These are called journal entries.

A journal shows all the transactions for the accounting period. These entries are posted to the ledger, which contains all the account balances.

Recording business transactions

3 Adjusting Entries and the Accounting Cycle

Adjusting entries are entries made at the end of the period to update the accounts.

Here are the steps in the accounting cycle:

  1. Analyze transactions
  2. Journal entries
  3. Post to the ledger
  4. Unadjusted trial balance
  5. Adjusting entries
  6. Adjusted trial balance
  7. Financial statements
  8. Closing entries
  9. Post-closing trial balance

The steps in the closing process are:

  1. Close revenue accounts
  2. Close expense accounts
  3. Close income summary
  4. Close dividends

Adjusting entries

4 Merchandising Activities

A service company sells a service to its customers. A merchandising company sells products. Accounting for merchandising companies that sell products is more complex than for service companies.

This lesson introduces companies that buy and sell inventory and the concept of cost of goods sold.

Cost of goods sold (COGS) is the cost of selling the products to customers. For most companies, the cost of goods sold is the largest expense on the income statement. The cost of goods sold is also called:

  • cost of goods
  • cost of sales
  • cost of revenue

Merchandising operations

5 Time Value of Money

The time value of money is a foundational concept in finance. There are two ways to calculate time value of money:

  1. simple interest
  2. compound interest

Simple interest pays interest only on the principal, not on the accrued interest. It is the easiest interest to calculate.

The simple interest formula is Interest = Principal x Rate x Time, or I = PRT.

Compound interest pays interest on both principal and accrued interest.

Time value of money includes several formulas using compound interest:

  1. future value formula
  2. present value formula
  3. future value of an annuity formula
  4. present value of an annuity formula
  5. future value of an annuity due formula
  6. present value of an annuity due formula

These time value of money formulas use the following variables to calculate the TVM problems:

  1. FV: future value is a lump sum at a future date
  2. PV: present value is a lump sum at the current date
  3. r: periodic rate of return; some formulas use i for interest instead of r
  4. PMT: payment is an annuity or a stream of equal payments (+ or -) at equal intervals
  5. N: number of periods; number of years times the periods per year

Time value of money

6 Cash and Internal Control

This lesson focuses on three topics:

  1. cash and cash equivalents
  2. bank reconciliation
  3. fraud
  4. internal control

Cash includes coins, currency, demand deposits, and similar assets.

Cash equivalents include short-term liquid items that mature in three months or less. To be a cash equivalent, the investments must have a low risk of change in value.

A bank reconciliation serves as a verification tool. It ensures that the cash balances presented in a company’s books match the balances reported by the bank.

Fraud is knowing deception for financial gain. There are three infamous financial frauds in the 21st century:

  • Enron
  • WorldCom
  • Bernie Madoff

Internal control is a system in accounting and auditing to protect assets and financial records. It is required to comply with legal requirements and improve the company efficiency.

Cash, fraud, and internal control

7 Inventory and Cost of Goods Sold

A merchandising company buys and sells inventory. Inventory is a current asset on the balance sheet.

Selling this inventory moves its cost to the cost of goods sold (COGS) on the income statement.

There are several inventory methods that determine cost of goods sold:

  1. specific identification
  2. first-in, first-out (FIFO)
  3. last-in, first-out (LIFO)
  4. weighted average

Inventory and cost of goods sold

8 Receivables

Receivables are promises to pay from another entity. Receivables are assets on the balance sheet. There are several types of receivables:

  1. accounts receivable
  2. notes receivable
  3. interest receivable

Accounts receivable should be recorded at the amount the company expects to collect. This amount is called the net realizable value.

For example, if the accounts receivable balance is $50,000 but the company expects that $1,000 will not be paid, the net realizable value is $49,000. The $1,000 represents bad debts or uncollectible accounts.

There are two methods to account for bad debts:
1. Allowance method
2. Direct write-off method

Receivables

9 Long-Term Assets

Long-term assets include:

  • plant assets
  • intangible assets
  • natural resources

Depreciation is the allocation of the cost of a plant asset over its useful life. There are three popular depreciation methods:

  1. straight line depreciation
  2. units of production depreciation
  3. double declining balance depreciation

Long term assets

10 Current Liabilities

Current liabilities are debts that are due in one year or less.

Current liabilities

11 Long-Term Liabilities

Long-term liabilities are debts that are due in more than one year.

Long term liabilities

12 Corporations

Accounting for corporations include the following topics:

  • capital stock
  • dividends
  • retained earnings

Corporations

13 Statement of Cash Flows

Accounting for cash flows shows the cash flow statement.

Cash flow statement

14 Financial Statement Analysis

Financial statement analysis is using financial information to examine trends and financial ratios for a company.

15 Managerial Accounting

16 Job Order Costing

17 Process Costing

18 Activity Based Costing

19 Cost Volume Profit Analysis

20 Variable Costing

21 Master Budgets

22 Standard Costing

23 Capital Budgeting

24 Relevant Costing

25 Performance Measurement

Accounting Chapters

Here are the accounting chapters in The Ultimate Guide to Learn Accounting:

  1. Introduction to Accounting
  2. Recording Business Transactions
  3. Adjusting Entries and the Accounting Cycle
  4. Merchandising Activities
  5. Inventory and Cost of Goods Sold
  6. Time Value of Money
  7. Cash and Internal Control
  8. Receivables
  9. Long-Term Assets
  10. Current Liabilities
  11. Long-Term Liabilities
  12. Corporations
  13. Statement of Cash Flows
  14. Financial Statement Analysis
  15. Managerial Accounting
  16. Job Order Costing
  17. Process Costing
  18. Activity Based Costing
  19. Cost Volume Profit Analysis
  20. Variable Costing
  21. Master Budgets
  22. Standard Costing
  23. Performance Measurement
  24. Relevant Costing
  25. Capital Budgeting

See also Accounting Sample Exams.

Accounting Chapters

Here are the accounting chapters in The Ultimate Guide to Learn Accounting:

  1. Introduction to Accounting
  2. Recording Business Transactions
  3. Adjusting Entries and the Accounting Cycle
  4. Merchandising Activities
  5. Inventory and Cost of Goods Sold
  6. Time Value of Money
  7. Cash and Internal Control
  8. Receivables
  9. Long-Term Assets
  10. Current Liabilities
  11. Long-Term Liabilities
  12. Corporations
  13. Statement of Cash Flows
  14. Financial Statement Analysis
  15. Managerial Accounting
  16. Job Order Costing
  17. Process Costing
  18. Activity Based Costing
  19. Cost Volume Profit Analysis
  20. Variable Costing
  21. Master Budgets
  22. Standard Costing
  23. Performance Measurement
  24. Relevant Costing
  25. Capital Budgeting

See also Accounting Sample Exams.

Jeff Mankin
Jeff Mankin

Jeff Mankin teaches financial literacy and Excel. He is the founder of Finally Learn.

Articles: 102

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