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ACCT101 Financial Accounting by Mind Map: ACCT101
Financial Accounting
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ACCT101 Financial Accounting


Current ratio

Total current assets / Total current liabilities

Measures ability to pay its current liabilities

In general, >1.5 is safe, 1.0 is considered risky

Debt ratio

Total liabilities / Total assets

Measures overall ability to pay debts

In general, <0.6 is safe, >0.8 is considered risky

Gross Profit Percentage (Gross margin percentage)

Gross profit / Net sales revenue, Net sales revenue = Sales revenue - Sales returns and allowances - Sales discounts, Gross profit = Net sales revenue - Cost of goods sold

Measures profitabilitiy

Small increase may signal an important rise in income, and vice versa

Rate of Inventory Turnover

Cost of goods sold / Average inventory, Average inventory = (Beginning inventory + Ending inventory) / 2

Measures how quickly inventory is sold

Higher is desirable, Means more profits

Acid-test (Quick) ratio

(Cash + short-term investments +Net current receivables) / Total current liabilities, Net current receivables = Accounts receivable - Allowance for uncollectible accounts

Measures ability to pay current liabilities with current assets

In general, >1.0 is safe, It depends on company too. Wal-Mart has a Quick ratio of 0.2 but it is fine.

Days' Sales in Receivables

Average net receivables / Net sales revenue * 365, Average net receivables = (Beginning net receivables + Ending net receivables) / 2, Net sales revenue = Sales revenue - Sales returns and allowances - Sales discounts

Measures how many days it takes to collect the average level of receivables

Shorter the period, the faster cash is available, and vice versa

Used to evaluate companies

ACCOUNTING EQUATION Asset = Liability + Owner's Equity

Asset (Norm. Bal. -> Debit)

Contra-asset, Accumulated depreciation, Allowance for uncollectible accounts


Accounts receivable (A/R)

Notes receivable

Prepaid expenses

Property (land, building)

Liability (Credit)

Accounts payable (A/P)

Notes payable

Accrued liabilities, Unearned revenue, Interest payable, Salary payable

Owner's Equity (Credit)

Increase, Revenue (Credit), Contra-revenue, Sales returns/allowances, Sales discount, Sales, Service, Interest, Owner's investment

Decrease, Expense (Debit), Rent, Salary, Utilities, Supplies, Cost of goods sold, Owner's withdrawal


GAAP Principles

Entity concept, Each accounting entity is stands apart as a separate economic unit

Reliability (objectivity) concept, Accounting information must be verifiable

Cost principle, Record costs at their actual value, not at the value you think is worth

Going-concern concept, Assume entity will remain in operation

Stable-monetary-unit concept, Assume there is no inflation

Accounting Principles

Accrual vs. Cash-basis, Accrual accounting, Correct way, Accounting is done when the transaction occurs, Cash-basis accounting, Accounting is done only when cash is exchanged, Only have Revenue and Expense accounts, Cash receipts treated as Revenue, Cash payments treated as Expense

Accounting period, Yearly/fiscal yearly, Interim periods, Quarterly, Monthly

Revenue principle, When: revenue recorded when it has been earned, not before, Amount: actual cash value of the item transacted

Matching principle, 1. Measure all expense incurred during period, 2. Match expenses against revenues of the period, Goal: find net income or loss during period


1. Measures

2. Processes

3. Communicates


Prepaid (cash now, exp/rev later)

Expense, a. Cash- (Cr) -> Asset+ (Dr), Adjusting entry: b. Asset- (Cr) -> Expense+ (Dr), Prepaid rent, Supplies

Revenue, a. Liability+ (Cr) -> Cash+ (Dr), Adjusting entry: b. Revenue+ (Cr) -> Liability- (Dr), Unearned revenue

Accruals (exp/rev now, cash later)

Expense, a.Liability+(Cr)->Expense+(Dr), Adjusting entry: b. Cash- (Cr) -> Liability- (Dr), Interest exp. (i.e. loan interest), Salary expense

Revenue, a.Revenue+ (Cr) -> Asset+ (Dr), Adjusting entry: b. Asset- (Cr) -> Cash+ (Dr), Interest rev. (i.e. bank interest)

I know it's kinda confusing. Remember: Prepaid = cash now; expense with asset Accrual = cash later; revenue with asset


Dr. Depreciation Expense+ (expense)

Cr. Accumulated Depreciation+ (contra-asset; thus +)

Similar to the Prepaid Expense adjusting entry

Assets are marked at book value, that's why we use Accumulated Depreciation

Inventory Shrinkage

Dr. Cost of Goods Sold+ (expense)

Cr. Inventory- (asset)

Adjustment done for missing inventory due to theft or error

Accounting Cycle

During the Period

1. Journalize Entries, 3 Questions + Map, a. What are the accounts involved?, Think cash first, b. Increase or decrease?, c. Debit or credit?, i. Debit comes first in the journal, ii. Debit = Credit

2. Post to Ledger, Posting to the T-accounts

3. Prepare Trial Balance (unadjusted), Part of the Accounting Worksheet, Balance of the accounts during the period, NOT a financial statement, p.77 ex.2-12

At the End of Period

1. Prepare Adjusted Trial Balance, Part of the Accounting Worksheet, p.198 ex.4-2 to 4-6, p.143 ex.3-10

2. Prepare Statements, a. Income Statement, Multi-step, Lists several important subtotals like gross profit and operating income, p.270 ex.5-7, Single-step, Groups revenues and expenses together without drawing other subtotals, p.271 ex.5-8, p.202 ex.4-7, b. Statement of Owner's Equity, p.202 ex.4-7, c. Balance Sheet (unclassified), p.202 ex.4-7, d. Statement of Cash Flow, How to prepare this is not tested, p.20 ex.1-8

3. Record Adjustments, a. Journalize adjustments, b. Post adjustments

4. Close Accounts, Closing involves owner's equity only, Income Summary Account, Left (debit) = Expenses, Right (credit) = Revenues, Steps, a. Close Revenue to Income Summary, b. Close Expenses to Income Summary, c. Compute Income Summary Balance, Balance is on the left side (expense > revenue) = net loss, Balance on the right side (revenue > expense) = net profit, d. Close Income Summary to Capital, Net loss goes to Capital's Dr. (-), Net profit goes to Capital's Cr. (+), e. Close Withdrawals to Capital, Withdrawals to Capital's Dr. (-), f. Compute Capital Balance, p.204 ex.4-9

5. Prepare Post-closing Trial Balance, Part of Accounting Worksheet, p.207 ex.4-11, p.198 ex.4-5

6. Classify Assets and Liabilities, Current, Can be liquidated (converted to cash) or paid within 12 months, Assets, Cash, A/R, Supplies, Prepaid expense, Inventory, Liabilities, A/P, Notes payable (in one year), Salary payable, Interest payable, Unearned revenue, Long-Term, Anything that is not current is long-term :), Assets, Property, Plant assets, Long-term investments, Liabilities, Long-term notes payable

7. Prepare Classified Balance Sheet, Account format, p.209 ex.4-12, Report format, p.209 ex.4-13


Perpetual (incomplete)



Cost of Goods Sold, No. of units sold * Unit Cost, Costing methods (to obtain unit cost), Specific unit cost, For unique or high-priced items, Average cost, Third most popular, First-in, first-out (FIFO) cost, Most popular, Usually gives the highest net income due to rising prices of inventory, Attracts investors, Last-in, first-out (LIFO) cost, Second most popular, Usually gives the lowest net income due to rising prices of inventory, Conserves cash from taxes


Purchase, Purchases are not recorded into an Inventory account, Rather, there are separate accounts for Purchases, Purchase Discounts, Purchase Returns and Allowances and Freight In, Ending inventories are simply brought over to the next period, There is no actual Inventory account to keep track of the current inventory, pp.305-306

Sales, Same as perpetual, except there is no accompanying entry to Inventory/Cost of Goods Sold

Cost of Goods Sold, Cost of Goods Available - Ending inventory

Unit Cost, Purchase price - Purchase discounts

Credit Terms

Purchases usually paid on account, then paid later in cash

Usually stated as: x/y, x = % discount, n = net (no discount), y = cash payment due in days, eom = end of month


In (for purchases), Transportation cost on purchased goods, Thus, applies only to the buyer

Out (for sales), Transportation cost on goods sold, Thus, applies only to the seller

FOB (free on board), Shipping point, Buyer owns goods while in transit, Thus, buyer pays for freight, Cost is added to buyer's Inventory account, There is no account for transportation costs, Destination, Seller owns goods while in transit, Thus, seller pays for freight, Cost is added to seller's Delivery expense account

Gross Profit Method

Used to estimate inventory if some force majeure occurs

a. Estimate gross profit, Past usual Gross Profit Percent * Current Sales Revenue

b. Estimate cost of goods sold, Current Sales Revenue - Estimated Gross Profit

c. Estimate ending inventory, Cost of Goods Available - Estimated Cost of Goods Sold


Closing is done by matching the value in the Inventory account against the value of the actual inventory on hand, Any differing amount is adjusted for shrinkage (ref. /Adjustments/Shrinkage)

Lower-of-Cost-or-Market Rule (LCM), Demonstrates accounting conservatism, Requires inventory to be reported at the lower of:, Historical cost of inventory, Actual purchase price, Market value of inventory, Cost to replace the inventory on hand

Errors, Errors in the counting of actual inventory on hand, Understated, Cost of goods sold overstated, Gross profit understated, Net income understated, Overstated, Cost of goods sold understated, Gross profit overstated, Net income overstated, Only Cost of Goods Sold, Gross Profit and Net Income are affected, Simply remember that Gross Profit and Net Income follows the Ending Inventory's under or overstatement


Consistency, Same accounting methods from period to period

Disclosure, Report enough information for outsiders to make wise decisions about the company

Materiality, Account only for significant items—"material"—items that may cause someone to change a decision

Accounting Conservatism, Goal: to report realistic figures, Exercise caution in reporting figures


Net Sales Revenue (or simply "Net Sales"), Sales revenue - Sales returns and allowances - Sales discounts

Gross Profit, Net sales revenue - Cost of goods sold

Cost of Goods Available, Beginning inventory + Net purchases

Ending Inventory (Actual), Obtaining the actual number of units on hand * Unit Cost

Receivables (incomplete)

On Account

Purchase, Paid

Revenue, Collected



Card sales

Notes receivable



Abbrev. S

For sales on account


Abbrev. P

For purchases on account

Cash receipts

Abbrev. CR

For cash receipts

Cash payments

Abbrev. CP

For cash payments


Abbrev. J

For all other transactions

Abbreviations of the journals are basically the first letter of each of the words, except for the General journal, which is "J"