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PRDV201: Accounting Principles I

Unit 2: The Accounting Cycle   Suppose you purchase $500 of material for inventory, accept $150 in payment for merchandise sold, and pay $4,000 in employee wages.  How do you record these transactions with absolute certainty of what is available in your company’s account?  In this unit, you will learn about credits and debits, and how the aforementioned transactions are appropriately recorded using the accounting rules that you learned in Unit 1.

Being able to record the everyday financial transactions of a company is a central part of accounting.  Understanding the accounting cycle, and how transactions should be recorded, is fundamental in producing financial statements and making sound judgments about a company’s financial health.

How are assets recorded?  What about liabilities?  What is equity?  All of these questions will be answered in this unit, as you learn the specifics of the “fundamental accounting equation” and work through real-world examples.

As you navigate this unit, focus on the specifics of recording financial transactions and what each financial transaction determines, based on the way it has been recorded.

Unit 2 Time Advisory
This unit should take approximately 3.75 hours to complete.

☐    Subunit 2.1: 0.75 hours

☐    Subunit 2.2: 0.25 hours

☐    Subunit 2.3: 0.25 hours

☐    Subunit 2.4: 2.5 hours

Unit2 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Identify and discuss the steps of the accounting cycle. - Identify and describe the components of the fundamental accounting equation, and use this equation to demonstrate the relationship between the balance sheet and the income statement. - Define assets, liabilities, and shareholder equity. - Identify the components that contribute to the shareholder's equity. - Identify several types of assets and liabilities. - Distinguish between credits and debits. - Distinguish between the revenue recognition and the matching principles. - Define the adjusting process, and identify the two types of adjusting entries. - Describe and identify different types of estimated items. - Prepare journal entries based on a company’s financial transactions.

2.1 The Accounting Equation   - Lecture: Dr. Larry Walther’s Principles of Accounting: “The Accounting Equation” Link: Dr. Larry Walther’s Principles of Accounting: “The Accounting Equation” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which introduces the accounting equation.  Pay close attention to
the roles of assets, liabilities, and equity in the accounting
equation*.  *Please note that this lecture also covers the
information outlined in sub-subunits 2.1.1 through 2.1.3.  

 Watching this lecture and taking notes should take approximately 5
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: YouTube: EnlightenUp: Alf Eastergard’s “Accounting 101 Part 03 Assets Liabilities Equity” Link: YouTube: EnlightenUp: Alf Eastergard’s “Accounting 101 Part 03 Assets Liabilities Equity” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which outlines the relationship between assets, equity, and liabilities.  As you watch this lecture, pay close attention to the roles of assets, liabilities, and equity in the accounting equation and how the increase or decrease of one affects the values of the other components in the accounting equation.  Please note that this lecture also covers the information outlined in sub-subunits 2.1.1 through 2.1.3.

    Watching this lecture and taking notes should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.1.1 Assets   Note: This topic is covered by the video lecture assigned below subunit 2.1.  Pay close attention to what assets are and how they are recorded on the financial statements.

  • Lecture: YouTube: Susan Crosson’s “Accounting Basics 3 – Assets” (YouTube) Link: YouTube: Susan Crosson’s “Accounting Basics 3 – Assets” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which defines assets.  As you watch this lecture, pay close attention to the way assets are defined.  By the end of this lecture, you should be able to give several examples of assets that a business might have.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above. 

2.1.2 Liabilities   Note:Please note that this topic is covered by the video lecture assigned below subunit 2.1.  Pay close attention to the definition of liabilities and how they are recorded on financial statements.

  • Lecture: YouTube: Susan Crosson’s “Accounting Basics 4 – Liabilities” Link: YouTube: Susan Crosson’s “Accounting Basics 4 – Liabilities” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which defines liabilities.  As you watch this lecture, pay close attention to the how liabilities are defined.  By the end of this lecture, you should be able to give several examples of liabilities that a business might have.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.1.3 Equity   Note: This topic is covered by the video lecture assigned below subunit 2.1.

  • Lecture: YouTube: Susan Crosson’s “Accounting Basics 5 – Stockholders Equity” Link: YouTube: Susan Crosson’s “Accounting Basics 5 – Stockholders Equity” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which defines stockholder’s equity.  As you watch this lecture, pay close attention to the way equity is defined.  By the end of this lecture, you should be able to give several examples of ways businesses accumulate equity.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.2 Cash Accounting   - Lecture: Khan Academy’s “Cash Accounting” Link: Khan Academy’s “Cash Accounting” (YouTube)

 Instructions: Please click on the link above and watch the short
video lecture on the applications of cash accounting.  Pay close
attention to the real-world example that is used, and think of ways
this could apply to other financial transactions.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

2.3 Accrual Accounting   - Lecture: Khan Academy’s “Comparing Cash and Accrual Accounting” Link: Khan Academy’s “Comparing Cash and Accrual Accounting” (YouTube)

 Instructions: Please click on the link above, and watch the video
lecture, which details the key differences between cash and accrual
accounting.  It is important to know the difference between the two
accounting methods as each will dictate how accounting principles
are applied.  

 Watching this lecture and taking notes should take approximately 7
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

2.4 Double Entry System   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 2: Recording Business Transactions” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 2: Recording Business Transactions” (PDF)

 Instructions: If you have not already saved the PDF to your
desktop, please click on the link above to download the PDF.  Read
the section titled “The Account and Rules of Debit and Credit” on
pages 70–76.  As you read, be sure to pay close attention to how
transactions are recorded according to the accounting equation.  By
the end of this reading, you should know the difference between
credits and debits.  Please note that this reading also covers the
topic outlined in sub-subunit 2.4.1.  

 Reading this chapter and taking notes should take approximately 45
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.1 Debits & Credits   Note: That this topic is covered by the reading assigned below subunit 2.4.  Please focus on “The Account and Rules of Debit and Credit” on pages 69–76.  In this reading, pay close attention to when debits and credits are used when posting financial transactions.  Be sure to work through the text examples as you read along.

2.4.2 Journal Entries   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 2: Recording Business Transactions” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting“Chapter 2: Recording Business Transactions” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “The Journal” on pages 78–80.  Pay attention to
the significance of each column as well as the importance of journal
entries to the overall accounting system of a company.  

 Reading this chapter and taking notes should take approximately 10
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.3 General Ledger/T-Accounts   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 2: Recording Business Transactions” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting“Chapter 2: Recording Business Transactions” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.   Read
the section titled “The Ledger” on pages 80–95.  As you complete
this reading, take notes on the general ledger and how journal
entries can affect the general ledger balances.  Be sure to work
through the examples in the text as you read along.  

 Reading this chapter and taking notes should take approximately 45
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.4 The Adjusting Process   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting“Chapter 3: Adjustments for Financial Reporting” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link to download the PDF.  Read pages
126–130.  Begin your reading with the section titled “The Need for
Adjusting Entries,” which begins on page 126.  Read the text through
the section titled “Classes and Types of Adjusting Entries,” which
ends on page 130.  As you read, pay close attention to adjustment
entries and the circumstances that may surround adjustment entries
in business settings.  

 Reading this chapter and taking notes should take approximately 15
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.4.1 Deferred Revenue   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “Adjustments for Deferred Items” on pages
130–132.  Upon completion of this reading, you will understand
deferred items, how to properly record them on financial statements,
and the impact that they have on the accounting system.   

 Reading this chapter and taking notes should take approximately 10
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.4.2 Accruals   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “Adjustments for Accrued Items” on page 138–140. 
Take notes on the differences between accrued items and deferred
items.  Also, work through the text examples as you read along.  

 Reading this chapter and taking notes should take approximately 10
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.4.3 Estimated Items   2.4.4.3.1 Depreciation & Amortization   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 3: Adjustments for Financial Reporting” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled, “Depreciation” on pages 133–136.  By the end of
this reading, you will be able to properly calculate and record
depreciation items on various financial statements.  

 Reading this chapter and taking notes should take approximately 15
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

2.4.4.3.2 Bad Debt Expenses   - Reading: Professional Education, Testing and Certification Organization International: Accounting 1 “Chapter 9: Receivables” Link: Professional Education, Testing and Certification Organization International: Accounting 1 “Chapter 9: Receivables” (PDF)

 Instructions: Click on the link above and read Chapter 9 to learn
about accounting receivables controls. This article describes
methods used to estimate uncollectibles, and typical methods used to
record bad debts.  

 Reading this article should take you approximately 30 minutes to
complete.  

 Terms of Use: This resource is licensed under a [Creative Commons
Attribution-NonCommercial-ShareAlike 3.0 Unported
License](http://creativecommons.org/licenses/by-nc-sa/3.0/deed.en).
It is attributed to John Petroff, Nancy Paz, Tibebe Mengistu, and
Karen De Avila and the original version can be found
[here](http://www.peoi.org/Courses/Coursesen/ac/fram9.html).