Practice  Resources

Chapter 1: Accounting

Part I: Itroduction to accounting

This first chapter is a large itroduction to what we are going to deal with in future chapters. In order to save your time and to assure to you a maximum understanding of what this chapter is about, I decided to organize it as a collection of points and ideas that I will try to link them in order to have at the end a complete and clear vision of the chapter.

  1. Accounting information a means to an END:By this, we mean that the primary objective of accounting is to provide information that is useful for decision making purposes. The final product of accounting is the decision that is enhanced by the use of the accounting information. 

  2. People who practice acounting are called accountants. Look for the difference between an accountant and a CPA.

  3. To understand and use accounting information you have to understand:

    • The nature of economic activities that are described by the accountant.

    • The measurement and assumption techniques involved in developing accounting information

    • The information that is most relevant to decision makers.

  4. The accounting cycle:    please have a look at the text book page  5

    Explanation: the accounting process produce accounting information that is used in the process of making decisions. Once the decisions are made on papers ( signing contracts...) they have to be followed by activities in the market which are called economic activities. These economic activities will be analized recorded and studied by the accounting process to produce accounting information and the vicious cycle continue like that with no stop.

  1. There are three types of accounting information:

    • Financial accounting information

    • Managerial accounting information

    • Tax accounting

  1. The accounting system is composed of:

    • Personnel

    • Procedures

    • Records

    • Technology

        The main objective of the accounting process is to develop and communicate reliable accounting information to decision makers.

  1. The information produced by the accounting system should be cost effective. Its value should exceed the cost of producing it.

  1. Basic functions of an accounting system:

    • interpret and record the effect of economic transaction

    • classify the effect of similar transaction in a manner that will permit to the users of the information to see Totals and subtotals.

    • Summarize and communicate the information.

  2. Internal control is a process designed to provide reasonable assurance that the company:

    • produces reliable financial reports

    • complies with applicable laws and regulations

    • conducts its operation in an efficient and effective manner. Look for the diference between being effective and efficient.

  3. The components of internal control are:

    • control environment: is the foundation for all the other elemnts of internal control, setting the overall tone of the organisation

    • risk assessment: involves identifying, analyzing and managing those risks that pose a problem to the achievment of the organisation's objectives.

    • control activities: are the policies and procedures that management puts in place to adress the risks identified in the risk assessment.

    • information and comunication: developing the accounting system.

    • Monitoring enables the company to evaluate the effectiveness of its managerial policies.

Part II:  Financial Vs Managerial Accounting

Now that we talked a litle bit accounting in general and how it play a great rôle in assessing decision makers in their daily work, we will move to the second part of our chapter

    In this second part we will be comparing two types of accounting information. Financial accouting information and Managerial accounting information.

Financial Accouting Information: provides informations about the financial ressources obligations and activities of an entreprise that is intended for use primarly by external decision makers

Managerial Accounting Information: is the accounting information that is used by internal users in order to achieve the entreprise's goals

External users of financial accouting information are: OWNERS CREDITORS SUPPLIERS POTENTIAL INVESTORS....

Users are: CEO CFO VP line supervisor ….


  • Provide general information useful in making investments and credit decisions

  • provide information useful in assessing the amount, timing and uncertainty of future cash flows

  • provide specific information about economic ressources claims to ressources and changes in ressources and claims.


the main objective of Managerial accounting information is to help decision makers to achieve the mission statement of the company and also to evaluate the effeciency and effectiveness of the entreprise in order to reward good managment and to adjust critical areas.


  • A means

  • Historical

  • inexact and aproximate measures

  • General purpose assumption

  • Usefulness enhanced via explanation


  • Timeliness

  • identity of decision makers

  • oriented toward the future

  • measure of efficiency and effectiveness

  • a means

Part III: Integrity of the Accounting System:

Integrity refers to the following qualities:

  • complete

  • unbroken

  • unimpaired

  • sound

  • honest

  • sincere

The integrity of accounting information is enhanced via three ways:

1- Institutional features  

  • standars for the preoparation of accounting information

  • integral control structures

  • audits of financial statements

2- Professional accounting organisations

3- The personnel competence judgment and ethical behavior " blablablabla

Institutional Features

  • because accounting information has to be understood by a wide variety of people, they have to be made up following some standars. All around the world their are a large number of standars but in this course we will be talking only about two of them.

    • GAAP: generally accepted accounting principle is a set of principles and standards that direct the preparation of accounting reports in USA and some other countries.

      The GAAP is made up by the FASB « financial accounting standards board »

    • IFRS is like the GAAP but it is dedicated to an international use in countries stock exchange. The IFRS is made up by the IASB.

  • SEC: security and exchange comission is a governmental agency with the legal power to estabilish accounting principle and financial reporting requierment for publicly owned corporations. The SEC give the legal power to the FASB in order to assure a wide spread acceptance of its new accounting standars.

  • PCAOB: public company accounting oversight board is a quasi governmental body charged with the oversight of the public accounting profession

  • Audits of financial statements: an audit is an investigation of the company's financial statemnts designed to determine the fairness of these statements. Audits gives a large inssurance to outside users of financial information that these information is reliable

Professional Accounting organizations

professional organization play an important rôle in improving the quality of accounting information.




Provides members with ressources, information and leadership to enable them to do their work as perfectly as possible.


Provides members with professonal development opportunities through education, association with business professionals, and certification ( CMA CFM)


Advancing accounting education and research and influencing accounting practice.


Is a voluntary private sector organisation dedicated to improving the quality of financial reporting through business ethics, effective internal controls and corporate governance.

This is all for this first chapter.


Concerning the  ROI AND ROF please have a look at the book pages 10 and 11. it is very well explained and i hope easy to understand.


Chapter 2: Basic Financial Statements


A primary source of financial information is a company's financial statements. These statements provide tremendous insight into the the current financial status of the company and how the company has been suceessful in meeting its financial goals.

In this chapter we will be introducing three kinds of financial statements:


  1. The statement of financial position (Balance Sheet)

  2. The income statement

  3. The cash flow statement


    what is a statement?

    A statement is simply a declaration of what is believed to be true about an entreprise




  1. The statement of financial position or the balance sheet demonstrates where the company stand, in financial terms at a specific point in time. It is like a snapshot of the entreprise.



Name of the company

Balance Sheet



Assets:                                                      Liabilities:


Cash                                                    Account Payable

Account Receivabale                             Note Payable

Note Receivable                                    Salaries Payable


Office equipment                                 Owners' Equity:

Land                                                      Capital Stock

Building                                                  Retained Earnings

Total                                                       Total




we will base our study on the balance sheet above.

  1. Its components: from the balance sheet above we can clearly notice that a statement of financial position is composed of three main parts:

    • The Assets: the assets are economic ressources that are owned by a business and are expected to benefit future cash flows. Assets can either have a physical composition ( cash, land, building...) or a non physical one ( accoount receivable, prepaid rent,...).

      The problem with some assets is the determination of their dollar amount. (building, land, used cars,...) to asses accountants and CPAs in solving this problems some professional organization « FASB... » elaborated some principles such as: 

      • The cost principle: states that assets like building cars land etc should be recorded in the balance sheet at their historical cost (the price at which the company had bought them)

      • The going concern principle states that because a company cannot stand up without its building and land, these kind of assets that are vital and less likely to be sold should not be recorded at their market value, but rather they should be recorded at their historical cost

      • The objectivity principle: states that because the market value of buildings and lands « just an example you can take any other suitable asset » are not objective, they can not be justified, and they may change from one second to another, these kind of assets should be recorded at their historical cost because at least this one can be justified and prooved.

      • The stable $ assumption. Because the monetary value of the $ or any other unit is not constant due to the inflation and deflation some consideration has been given to the use of balance sheets that would show assets at current appraised values or at replacement cost rathet that at historical cost.

    • The Liabilities: liabilities are financial oblogations or debts, theyr represent negative cash flows for the entreprise. Liabilities represent claims against the borower's assets. As we shall see the owners of the business also have claims on the company's assets. But in the eyes of the law creditors' claims take priority over the owners' claims. That is why in the balance sheet, liabilities are listed above Owners' equity.

    • Owners' Equity:owners' equity represents the owners' claims on the assets of the busines.    Increases in owners' equity are due to:

      • investments of cash or other assets by owners 
      • earning from profitable operation of the business

      Decreases in owners' equity are due to:

      • payment of cash or transfers of other assets to owners

      • losses from unprofitable operation of the busines

    2. Important ideas about the balance sheet


  • The assets are ranked following their ability of being convert to cash. That is why we start with cash, then account receivable, then note receivable....

  • Liabilities are listed with respect to the priority of payment. Account payable are in most cases due before note payable.

  • The total of liabilities plus owners' equity must be equal to the total amount of assets. This is the most important characteristique of the balance sheet. This feature is coming from the accounting equation:


  • To get used with recording the effetc of transactions on the balance sheet, please have a look at the text book pages 47 TO 50 « Financial Acconting 13e »


II. The Income Statement

    The income statement is a summarization of the company revenue and expense transactions for a period of time.

  • Revenues are increases in the company's assets from its profit directed activities.

  • Expenses are decreases in the company's assets from its profit directed activities.

  • Net income = revenue – expenses

  • The heading of the income statement is as follow


    The name of the company

    Income Statement

    The period of time



    The income statement may describe the effect of many transaction such as revenue expenses payment of devidends sale of additional shares of capital stock.

  • The income statement reports on the financial performance of the company in terms of earning revenue and incuring expenses over a period of time and explains in part how the company's financial position chaged between the begining and the ending of that period.





III. The statement of cash flows

The statement of cash flows classify various cash flows into three categories:

  • Operating activities: are the cash effect of revenues and expenses of the company related to its area of work

  • Investing activities: are the cash effect of buying and selling assets.

  • Financing activities are the cash effect of owners investing in the company, creditors loaning money to the company and the repayment of either one or both.

    The negative cash flow in the cash flow statement is in parentheses

For further reading please check the texte book                              (FINANCIAL ACCOUNTING 13e)

Also try to use youtube, there are plenty of videos and online courses available for free, just type the suitable key words.


Chapter 3: The Accounting Cycle

1) Accounting Cycle is the sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports.

2) The Accounting Cycle generally consists of 8 specific steps, in this chapter we will be talking only about three of them:



Trial balance 

3) The role of Accounting Records

Establishing accountability for the assets and/or transactions unders individual's controle

Keeping track of routine business activities

Obtaining detailed information about specific transactions

Evaluating the efficiency and performance of various departmens within the organization

4) The ledger account or simply the account is a means of accumulating in one place all the information about changes in specific financial statments items. The sipmlest form of an account is when it has only:   a title; a left side called debit and a right side called credit.

5) The entire groupe of accounts is kept together in an accouting record called a ledger.

6) Debiting and Crediting??????????????????????

Assets :  Normal Debit Balance


Liabilities: Normal Credit Balance


Owners' Equity:Normal Credit Balance


Revenue:Normal Credit Balance


Expenses: Normal Debit Balance

     Additional Information:     Dividends have a Normale Dabit Balance  

                                            Retained Earnings have a Normal Credit Balance

7) The balance of an account is the difference between the total of the debit and credit entries in the account.

if the debit total   >   the credit total                        the account has a debit balance

if the credit total   >   the debit total                                     the account has a credit balance                       Koji town

8)  " The double entry Principle " states that each transaction has to be reported to at least two accounts.  

this principle can be easly understood if we use the accounting equation:   in order to keep the equality between the two sides of the accounting equation "A=L+O.E"  each effect on the left side of the accounting equation has to be accompagned by a similar change in the right side of the equation.

9) In an acctual accouting system, the information about each business transaction is INITIALLY in an accounting reccord called the Journal and later this information is transfered "posted" to the appropriate accounts in the general ledger.

The jornal is a choronological (day by day) record of business transactions.


1) net income is an increase in owners' equity from the profitable operations of the business. Net income is a computation of the overall effects of many business transaction on the owners' equity. 

Net income is equal to the income that a firm has after subtracting costs and expenses from the total revenue. Net income can be distributed among holders of common stock as a dividends or held by the firm as retained earnings.

Net income or net loss=       Revenue    -     Expenses

A buisiness operating at profit may run short of cash.

Net income must be related to a specific period of time.

2) Retained earnings account appears in the owners' equity section of the balance sheet. earning net income cause the balance of the retained earning account to increase, if we assume that no dividends were given to stockholders. Dividends?????????????

Dividends are just part of the net income recorded by a company in a certain period and that the management decided to share with its investors. Each investor will receive an amount of money depending on the number of share that he owns.

when a company distribute dividends it decrease the balance of the Owners' Equity, because instead of taking all the net income and investing it, the company may decide to sacrify a part of it and give it as dividends.


The balance of RETAINED EARNING account represents the total net income of the corporation over the entire lifetime of the business, less all amount that have been distributed to the stock holders as dividends. retained earning are the amount of money dedicated by the company to finance its growth.

Accounting periods:  the period of time covered by an income statement is called the company's accounting period. usually, net income is measured for relatively short accounting period of equal lenght. this concept is called the Time period principle.

Revenue is the price of goods sold and services rendered during a given accounting period. 

Expenses are the costs of goods and services used up in the process of earning revenue. An expense always causes a decrease in owner's equity.    

Revenue should be offset by all the expenses incurred in producing revenue. = The Matching Principle


The Ledger Balance just have a look at page 110 "F.A 13e"

Remember that the the trial balance provides proof that the ledger is in balance. The agreement of the debit and credit totals of the trial balances gives assurance that:

1- equal debits and credits have been recorded for all transactions

2- the addition of the account  balances in the trial balance has been performed correctly.  



Chapter 4:    Accruals and Deferrals

Use the link bellow, I think it's well developed.

Adjusting Entries, Accruals and Deferrals, ...... 

Good reading.

Adjusting entries and Accounting Principles

Adjusting entreis are tools by wich accountants apply the Realization   and  Matching Principles

Through these entries, revenues are recognized as they are earned, and expenses are recognized as ressources are used or consumed (used up)  in producing the related revenue.


lets move now to another concpet, called the concept of materiality:

The concept of materiality  allows  accountants to use estimated amounts and to ignore certain accounting principles if these actions will not material effect on the financial statements. A material effect is one that might reasonably be expected to influence the decisions made by the users of financial statements.


Chapter 5:  The accounting cycle 6, 7, 8   

In this chapter:  1- We examine how companies prepare general-purpoce financial statements used by investors, creditors and managers.          

            2- we illustrate several methods of evaluating liquidity and profitability using financial statement information.

            3- we complete the accounting cycle by: preparing Overnight's fiancial statements, performing year end closing entries, and presenting the companies after closing trial balance.

I- Preparing Financial Statements 

 Briefely: you have to know that publicly owned companies have an obligation to publish annual and quartely information to their stockholders and to the public. These companies do not simply prepare financial statement, they prepare annual reports.

Annual report  VS Financial Statement

an annual report includes comparative financial statement for several years and a wealth of other information about the company's financial position, business operations, and future prospects.

The preparation of the financial statements can only be done as follow:  first we prepare the income statement, then the statement of retained earning and at the end we prepare the balance sheet. WHY????   look at the following video and listen carefully. 

For those who have small ears: 

The income statement is prepared first because it determines the amount of net income to be prepared in the statement of retained earnings. The statement of retained earnings is prepared second because it determines the amount of retained earnings to be reported in the balance sheet.

A word about the Income Statement: 

kijkij   Alternative titles for the income statement are: earning statement, statement of operations, and profit and loss statement. The income statement is used to summarize the operating results of a business by matching the revenue earned during the given period of time with the expenses incurred in generating that revenue.

An income statement has several limitations:

  • The amount shown for depreciation expense are based only upon estimations.
  • The income statement includes only those events that have been evidenced by actual business transactions, and can not reflect the real effect of some business activities as the influence of  ads on customers. .... 

A word about the retained earning statement:

Retained earning is that portion of stockholders' equity created by earning net income and retaining the related ressources in the business. The ressources retained from being profitable may include, but are certainly not limited to, cash. The statement of retained earnings summarizes the increases and decreases in retained earnings resulting from business operations during the period. Increases in retained earnings results from earning net income and decreases result from net losses and from the declaration of dividends.

The statement of retained earning is based on the following equation: 

Begining retained earnings + Net Income - Dividends  =   Ending Retained Earnings

 A word about dividends: 

A word about the balance sheet:


Adequate Disclosure 

Adequate disclosure refers to meeting the minimum essential data disclosure requirements of various laws, such as gift tax return disclosures in tax law. brokers' fees in securities law, and other disclosuer requirements. In the corporate context, it is the concept that financial statements and their accompanying footnotes should contain all the pertinent data believed necessary to the reader's understanding of a business's financial status.


Closing the temporary accounts:

Just have a look at your texte book (financial accounting 13e page 200)