Journal Entry

Accounts Receivable
Cost of Goods Sold
  Accounts Payable

The Accounting Equation

Assets = Liabilities + Owners Equity

  1. Assets
    1. Economic resources expected to benefit company in future
      1. Cash: Money, certificates of deposit, and checks
      2. Accounts Receivable: Oral or implied promise, usually arise from sales made to customers, no promissory note exists
      3. Notes Receivable: Promissory notes
      4. Inventory: Merchandise the entity holds or manufactures to sell
      5. Land: Property the business owns and uses in operations
      6. Building: Cost of an office, warehouse, garage, etc.
      7. Equipment, furniture, & fixtures: Accounts that record the cost of office equipment and store equipment
  2. B. Liabilities: Economic obligations, debts
    1. Accounts Payable: Oral or implied promise to pay debts which arise from credit purchases
    2. Notes Payable: Amounts the company must pay as a result of signing a promissory note for goods or services.
    3. Taxes payable: Wages payable, Salary payable
  3. C. Owners’ Equity: Claims held by owners, divided into two main categories
    1. Accounts Payable: Oral or implied promise to pay debts which arise from credit purchases
    2. Retained Earnings (Income earned from operations)
      1. Expenses: Decreases in retained earnings resulting from operations.
      2. Revenues: Increases in retained earnings resulting from operations
      3. Dividends: Distributions of assets to shareholders decreases

Concepts, Principles and Basis

  1. Entity Concept
    • An organization stands apart from other organizations as a separate economic unit
  2. Going Concern Concept
    • Entity will continue to operate long enough to recover cost of its assets
  3. Time Period Concept
    • Report information at regular intervals
  4. Reliability Principle
    • Accounting records must be based on the most reliable (verifiable by an independent observer) data available
  5. Cost Principle
    • Assets/services acquired are recorded at actual, historical cost
  6. Revenue Principle
    • Establishes when to record revenue, usually when earned
    • Revenue is earned when the business has completed rendering services to the customer
    • Amount to record is equal to cash value of services or goods
  7. Matching Principle
    • Expenses matched against revenues in same accounting period
  8. The Accounting Period
    • Usually one year ending December 31
    • Fiscal year ends on any other date of the year
  9. Cash Basis Accounting
    • Impact of events not recognized until cash is paid or received
  10. Accrual Basis Accounting
    • Impact of events recognized as they occur
    • Transactions are recorded even when cash not received or paid
    • Required by GAAP
  11. Stable Monetary Unit
    • Basis for ignoring inflation