Domain 1: Accounting Basis

●​ Lesson 1: Accounting Concepts and The Double-Entry Accounting Method

-​ Ethical Responsibilities
➢​ Bookkeepers are responsible for the financial integrity of a client’s records and, as such, must
inform them of any suspicious activity or illegal requests. And also, responsible to the client and
should maintain confidentiality in every interaction. Society depends on those keeping records to
provide clear and honest information.
➢​ Untrustworthy financial records could cause an investor to lose money or a bank to refuse a loan.
Compliance with the law is equally important, and subpoenas guard bookkeepers from any loss
of integrity in discussions regarding clients’ financial status.
-​ Accounting Equation
➢​ It always balances. What the business owns always equals what it owes.
➢​ Assets = Liabilities + Shareholder’s Equity
➢​ Assets > things of value that the business owns (cash, inventory and equipment)
➢​ Liabilities > what the company owes (bank debt, employee wages or taxes)
➢​ Shareholder’s equity > what’s left to be claimed by the owner or shareholders. Asset - Liabilities
-​ Important Financial Reports
➢​ Balance Sheet
❖​ to look at a company’s net worth at a single point in time
❖​ Limitation: assets are recorded at historical cost, which is the original cost at which the
company acquired the asset. The drawback to this is that the asset may be worth more
money now than when it was originally purchased. It used HC so that assets are not
overstated. However, with a significant increase in value over time could be a
disadvantage to the company
➢​ Statement of Equity
❖​ To show the changes in the owner’s equity from the opening balance to the end of the
accounting period balance.
❖​ Require at the end of the fiscal year
❖​ Shows detailed information on changes in equity assets that are not distinctly reported in
any of the other financial statements
❖​ Useful in identifying factors that cause changes in the owner’s equity
➢​ Income Statement
❖​ Shows summarizes a company’s revenue, cost, and expenses over a given period. And
also, net income
❖​ Company’s profitability and can help the owner determine whether the business can
generate a profit by increasing its revenue or decreasing its costs
❖​ Disadvantage: does not tell investors much about the company’s past profitability.
❖​ Focus on current profits or losses
➢​ Statement of Cash flows
❖​ It provides information about the movement of money in and out of the company during
an accounting period
❖​ It helps investors and shareholders see and gain a better understanding of how much
money a company is earning or spending
❖​ Disadvantage: cash spending can be delayed to increase the company’s net cash inflow.
While this can improve the immediate cash flow, it will affect the future cash flow
❖​ This report and the delaying of spending to improve appearance is one way your integrity
and advice to your client may come into play; be sure you offer an accurate picture to
owners and investors
-​ Double-Entry Accounting and T-Accounts
➢​ Double-Entry Accounting
❖​ A method bookkeepers use to enter transactions
❖​ The system of entering a transaction to an account with a corresponding opposite entry
to a different account
❖​ Uses debit and credit journal entries for every transaction a company completes, and the
entries must be equal to maintain balance in the accounting equation.
Account Debit Credit

Assets Increase Decrease

Liab and OE Decrease Increase

❖​ Does not eliminate errors, but it does help catch errors easily and provide higher
accuracy.
 ➢​ T-accounts
❖​ are visual representations of double-entry accounting to make it easier to manage
because we can see how the money flows within each account and also ideal for spotting
errors
Account Name

Debit Credit
- Dividends - Liabilities
- Expenses - Owner’s Equity
- Assets - Revenue
❖​
-​ Transaction Journal and General Ledger
➢​ Transaction journal
❖​ Chronological record of transactions coming in and out of a business.
❖​ This is important as they keep a record of business’s dealing and which accounts are
being impacted
❖​ The post reference > this number correlates with the account on the general ledger to
which the transaction was posted
➢​ General ledger
❖​ Use transaction journal information
❖​ Records all of the company’s transaction by organizing them into it’s chart of accounts
❖​ Journal Ref. > based on pages of translation journal
●​ Lesson 2: Accounting Cycle Concepts and Accounting Principles
-​ Accounting Cycle
➢​ A multistep process that systematically records all of the business transactions without missing
any entries.
➢​ It is important as it’s provide accuracy
➢​ Step 1: Transactions
❖​ The process of analyzing a business’s dealings to determine how it affects the company
➢​ Step 2: Journal Entries
❖​ Placing transactions in journal entry
❖​ Important to remember which accounts increase when debited and which increases when
credited
➢​ Step 3: General Ledger Post
❖​ The transaction journal is used to fill in the accounts in the general ledger
➢​ Step 4: Trial Balance
❖​ All of the transactions of the established period are brought into focus
❖​ Allows for the location of possible errors
➢​ Step 5: Worksheet
❖​ The debits and credits are out of balance, and a worksheet will help to set them right
❖​ Limited mistakes happen all the time in the real world.
➢​ Step 6: Adjusting Entries
❖​ To enter changes that occurs naturally during business bu do not trigger a paper trail
❖​ Includes accruals and deferrals
➢​ Step 7: Financial Statements
❖​ Once everything are balance and all the adjustment have been entered into the general
ledger, we can create a financial statement
❖​ Should be prepared in specific order: Income > OE > Balance Sheet > Cash Flow
❖​ These are prepared in order because each one relies on information from the statement
prepared before them. (Ex. Income profit/loss > OE and ending owner’s capital > balance
sheet)
➢​ Step 8: Closing the books
❖​ The bookkeeper finalizes all of the statements and ensures that each is accurate before
presenting them to owners and investors
❖​ Allows a company to get a picture of its financial status
❖​ Gives the bookkeeper the beginning balances needed to begin the next cycle
❖​ Transaction journal and General Ledger pages are file
-​ Adjusting Process
➢​ Allows the accountant to adjust previously recorded entries so that revenue and expenses are
acknowledge when they take place
➢​ This process brings accounts to their correct balances and ensures that transactions are
recorded in the correct accounting period
➢​ Adjustment should be completed before closing
 ➢​ 3 Types:
1.​ Accruals
❖​ occurs when revenue or expenses are recorded at the time of the transaction,
not when the payment is made
❖​ Original Entry: Debit Accrued Revenue Credit Revenue
❖​ Adjust: Debit Account Receivable Credit Accrued Revenue
❖​ Revenue must be recognized when it is earned, not when it is received
2.​ Deferrals
❖​ Occur when a company pays or receives payment but cannot report the amount
on the current income statement because it will either be an expense or revenue
in a future accounting period
❖​ Prepaid Expenses are recorded as an asset initially and then expensed through
adjusting
❖​ Deferred revenue is the opposite of deferred expense. It is a liability.
3.​ Non-cash expenses
❖​ Most commonly used to adjust depreciation, it is an accounted for to devalue
physical objects as they lose their value throughout their useful life (the estimated
number of years that an asset is considered useful before its value is completely
depreciated)
-​ Post Adjusting Journal Entries
➢​ We maintain the dual-entry system so that at least two accounts are affected which is it’s either
revenue or expense account and asset or liability account
➢​ Total revenue - Total expense = Net Income
❖​ Adding an adjusting journal entry will increase or decrease the company’s net income
along with the owner’s equity
❖​ An increase expense will decrease equity
❖​ An increase revenue will increase equity
➢​ The balance sheet is also affected by an adjusted journal entry
-​ Accounting and Reporting Assumptions
➢​ A set of rules that make certain that a company’s operations are efficient and follow Financial
Accounting Standards Board (FASB) standards
➢​ The purpose is to encourage consistent, reliable, and objective information
➢​ 6 assumptions:
1.​ Reliability
❖​ To only record accounting transactions in their financial statements that can be
verified through bank statements, invoices, billing statements, or receipts.
2.​ Consistency
❖​ Intends for companies to use the same method of accounting for all of their
accounting periods
❖​ Helps when comparing statements from multiple different financial periods
3.​ Time Period
❖​ Requires that the accounting practices and methods a company uses must be
reported and maintained for a set period of time
❖​ It is the company’s job to ensure that these period are consistent each year so
that financial statements become easier to read and compare
4.​ Going Concern (Continuity Assumption)
❖​ Expects a company to continually deliver its business operations for an extended
period of time
❖​ Comes from the expectation that a company will never go bankrupt
5.​ Economic Entity
❖​ Separates the owner of the business’s financial records from the company’s
financial records
❖​ Business transaction should never be mixed with personal transactions
6.​ Money Measurement
❖​ This concept requires that every recorded transaction must be recorded and
expressed in monetary terms
➢​ These assumptions help the company and investors determine the company’s true financial well
being. They also help them make investment-related decisions and help the company set goals
and objective for improvement
-​ Transactions as Revenues or Expenses
➢​ Revenue
❖​ Income that a company earns through the sale of goods and services
❖​ Ex. Fees earned on an investment and Customer payment for a completed job
 ➢​ Expenses
❖​ The costs associated with primary day-to-day business operations
❖​ Ex. Employee salaries and Online advertising
-​ Accrual V.S. Cash Accounting
➢​ Accrual
❖​ Records revenue and expenses when they are earned, even if the payment has not been
received
❖​ Businesses with revenue over $25 million are required to use accrual accounting
❖​ The downside is that the cash flow is not accurately depicted
➢​ Cash
❖​ Small businesses with limited funds use this method where revenue and expenses are
recorded when money changes hands, even if that is weeks or months after it is earned
❖​ Determining when transactions have taken place is easier
❖​ The downside is that it does not provide a realistic outlook of the company’s income and
expenses during that period of time or over an extended period of time

Domain 2: Accounting for Assets and Sales Transactions

●​ Lesson 1: Assets and Sales Transaction and Importance of Merchandise Inventory
-​ Assets and Natural Account Balance
➢​ Asset > any company-owned or controlled resource that can be converted into cash or cash
equivalents. Ex: retirement, inventory, and property accounts
➢​ Natural debit balance
❖​ Identified by understanding where the account is in the accounting equation
❖​ Asset accounts are debit natural whereas Liabilities and OE accounts are credit natural
which results to normal balance
❖​ Knowing the natural balance of each account helps identify any data entry mistakes such
as crediting an account when it should be debited or vice-versa
❖​ Makes double-entry bookkeeping possible
❖​ Increase in debit transaction and decrease in credit transaction
❖​ Expense and dividend accounts also have a debit normal account balance as they are
used to record goods. Services, and interest that is acquired
➢​ Natural credit balance
❖​ Increase in credit and decrease in debit
❖​ Liabilities, OE, revenue and retained earnings
-​ Current V.S. Long-Term Assets
➢​ Long-Term Assets (Fixed Assets)
❖​ Intended to be used for more that one year
❖​ Ex. Equipment, Vehicles, Computers and Buildings (PPE)
❖​ Slowly lose their value or depreciate over their useful life
❖​ Businesses need long-term assets because they make up a large percentage of their
overall worth
➢​ Current Assets (Short-term Assets)
❖​ Intended to be used or converted to cash within one year
❖​ Helps pay for the business’s day-to-day operational expenses and feed the business’s
cash flow
❖​ Ex. Inventory and Accounts Receivable
❖​ The money your customers owe you
-​ Accounting for Sales Transactions
➢​ Sales
❖​ The gross inflow of revenue earned through a business selling its products and services
❖​ Allow a business to account for the revenue they are earning
❖​ Primarily deals in service. Ex. could be paving a customer’s driveway or an addition to a
customer’s home
❖​ Hardware Sales > products such as hammers and screws
❖​ Made on cash or credit
➢​ Cash Receipt
❖​ The collection of monet form a customer, investor, or bank, which increase the cash
balance
❖​ Cash Sale: Debit:Cash ; Credit:Sales Revenue
❖​ Credit Sale: Debit:Receivable ; Credit: Sales Revenue
❖​ Often used to offset accounts receivable
➢​ Accounts Receivable
❖​ The balance of money owed by customers that has not yet been paid
❖​ After the funds for a credit sale are paid, Debit:Cash ; Credit:Receivable
 -​ Notes Receivable and Uncollectible
➢​ Notes Receivable
❖​ Assets of a business, organization, or bank that represent the right to receive the
principal amount written in a promissory note from another party
❖​ Promissory note is a legally binding agreement that states that a business is owed money
and when payment is expected
❖​ It is important to note that any amount received within one year is reported as a current
asset and any remaining portions of the notes receivable not due within the first year are
reported as long-term assets
➢​ Accounts Uncollectible
❖​ When receivable have no chance of being paid maybe the debtor has filed bankruptcy,
the transaction involved fraud or the debtor cannot be located
❖​ Are often written off, causing the business to forfeit the money
❖​ The reason businesses write off bad debt is to prevent taxes on income they never
received
-​ Merchandise Inventory
➢​ Are the goods have been acquired by distributors, wholesalers or retailers with the intent of
selling those goods to customers.
➢​ It is the goods a company has on hand for resale for a company.
➢​ The companies keep merchandise inventory so that they have goods available to meet customer
demand
-​ Inventory Valuation Methods
➢​ An accounting practiced used to find the value of unsold inventory when preparing financial
statements
➢​ Items may have been purchased at different prices over time. Bookkeepers need to use a
common rate to calculate the final value
➢​ Helps the company determine its inventory turnover rate and plan for future purchasing
➢​ Common rate calculation techniques:
1.​ First-in, First-out (FIFO)
❖​ Assumes that the first inventory items purchased will be subtracted from the first
list of products that enter a warehouse or store
❖​ Ex: 70 hammers had been sold by July
April 25 hammers $10 25 x 10 = $250

May 25 hammers $12 25 x 12 = $300

June 50 hammers $15 20 x 15 = $300

COGS $850

2.​ Last-in, First-out (LIFO)

❖​ Assumes that the last items to enter the store are the first ones to leave the store
3.​ Weighted Average Cost (WAC)
❖​ Uses the average cost of items throughout the year
❖​ Ex: $800 for candy bars for one year and purchase 960 individual candy bars
$800/total units purchased > $800/960 = $0.83 per candy bar
-​ Adjust Inventory Balances
➢​ The purpose of making adjustment is to ensure that the inventory account balance accurately
states the value of the inventory
➢​ Inventory shortages (Shrinkage) can happen for several reasons:
❖​ When the inventory deals with perishable items, the inventory could go out date before
being sold, items could become obsolete, theft can occur, or there could be an
administrative error
❖​ Ex: beg. Inventory = 15,000 end inventory = 14,500 so Debit:Cost of Goods Sold 500 ;
Credit:Merchandise Inventory 500
●​ Lesson 2: Depreciation Concepts and Term, and Effects on the Accounting Equation
-​ Service Life and Depreciation
➢​ Useful Life > The time period in which an asset is depreciated
➢​ Depreciation > An asset’s decreasing value over time
➢​ Depreciation in accounting > Talks about spreading the cost of buying an asset over a period of
time, usually the asset’s useful life
➢​ Methods:
1.​ Straight-line > Depreciates the asset at an equal amount over its useful lifetime.
Formula: Amount - RV / Useful life
 2.​ Declining-balance method is an accelerated method resulting in higher depreciation
expenses for the company during the beginning years and lower expenses during the
later years
3.​ Sum-of-the-years method an accelerated method that results in higher expenses during
the earlier years of the asset’s useful life
-​ Depreciation Expense on Income Statements
➢​ Reported as an expenses in order to record its loss in value over its service life
➢​ What the asset is used for within the company determined were the depreciation expenses will be
listed
-​ Sales Transactions and Merchandise Inventory Effects
➢​ Sales: When a business collects a cash payment for a sale, its cash account increases
➢​ Merchandise Inventory affects the assets portion of the accounting equation because inventory
is an asset to the company, as it can be sold for a profit.
-​ Common Property and Equipment
➢​ Known as PPE which includes buildings, furniture, land, machinery, computers and vehicles
➢​ When they are purchase, they increased asset on balance sheet
➢​ Affect expense account when they are depreciate and also liabilities because they are often
bought with long-term loans
-​ Other Assets Transaction Effects
➢​ Interest expenses
❖​ the cost incurred by a company for its borrowed funds
❖​ If you take out a mortgage to purchase an office building, you are charged interest on the
money you have borrowed until the principal is paid off
❖​ Affect the liability to increase if they have not been paid
❖​ If the company has paid the interest in advance it will increase asset
➢​ Royalty Income
❖​ Earned through an entity allowing someone to use their intellectual property or resources
❖​ Ex. Franchise, Patent, Copyrighted works and Natural resources
➢​ When fixed assets are sold, the accounting equation affect in different ways:
1.​ The depreciation is removed, which increases the equipment’s expense account
2.​ Company has sold an asset, the asset decreases
3.​ When they receive payment for the purchase, it will then be record in cash and the asset
increase

Domain 3. Accounting for Liabilities, Equity, Purchase Transactions

●​ Lesson 1: Liabilities, Purchase and Payroll Transaction
-​ Natural Account Balance and Liability Types
➢​ Liabilities > debts that your company owes to others includes debts like loans, taxes, and wages
you pay your employees
➢​ Current Liabilities > debts that will be paid within one year. Ex. credit card balances, accounts
payable and wages
➢​ Long-term Liabilities > debts that will not be paid within a year. Ex. mortgage, bonds and car
payments
➢​ Current and long-term are separate so that investors can see how liquid the company is
-​ Financial Statements with Liabilities
➢​ Knowing what your company’s liabilities are helpful to assess whether you have enough asset to
cover your financial obligations
-​ Purchases, Accounts Payables, and Cash Payments
➢​ Accounts Payable
❖​ An account within the general ledger. Represents the money owed by the company to
creditors (a person, company, corporation, or other institutions to which you owe money).
Money that will be repaid at a later date
➢​ Purchases
❖​ The cost of buying inventory of goods during an accounting period with the intent of
selling them to customers. They are expense and listed within the COGS
➢​ Cash Payments
❖​ Exchange of physical money (bills and coins) such as money exchange for goods and
service or employee hours worked
-​ Other Liabilities
➢​ Notes Payable > A written promise to repay from borrower to lender and recorded in general
ledger
➢​ Loans Payable > the remaining balance of the loan if a loan is not paid in full within the
accounting period
 ➢​ Interest Payable > the amount of billed and accrued interest owed by a company to its lenders
as of the balance sheet date. If the interest payable is greater than the normal loan account, it is
an indication that the business may be defaulting on its debt. Recorded in current
➢​ Taxes Payable > current liability and must be paid within the normal operating cycle and accrued
expense
-​ Payroll Accounting Terms
➢​ Payroll is the process of paying employees
➢​ Qualifications:
❖​ Obtain an Employer Identification Number (EIN) - nine digit number that the IRS assigns
to a company to identify the tax accounts of its employees
❖​ Determine if a state or local ID is needed
❖​ Gather employee documents like W-4s, I-9s, and FMS-2231s, which is a direct deposit
form as payment method but there are some methods such as paper check. Prepaid
debit card and cash
❖​ Determine your employee's withholdings (the amount of money taken out of every
employee’s paycheck to pay their income taxes for that pay period)
❖​ Deductions can include health insurance premiums, retirement, voluntary donations and
life insurance
➢​ Record > the documents they keep for each employee, including personalized information like
that employee’s pay rate, total compensation, tax deductions, hours worked, and benefit
contributions
➢​ Reports > a document used to verify a company’s tax liabilities or crosscheck financial data.
Includes pay rates, hours worked, accrued overtime, taxes withheld from wages, employer tax
contributions and vacation time
➢​ Reports and records are used to help employers to compute employee’s net pay
-​ Accounting for Payroll
➢​ Includes employee salaries, wages, bonuses, commissions, and payroll taxes withheld from
paychecks (taxes include federal, state, Social Security and Medicare)
➢​ Payroll Register
❖​ A document that record all employee payroll details such as hour worked, overtime,
gross pay (the income earned before taxes and deductions are withheld), net pay
(earning taken home after taxes and deductions are withheld), deductions, and payroll
date for a single pay period
➢​ Employee Earnings Records
-​ Payroll Tax Forms
➢​ W-4 (Employee’s Withholding allowance certificate)
❖​ Allows employees to tell their employer the amount of taxes to withhold from their
paycheck. The tax withholdings is based on the employee’s marital status and number of
allowances and dependents that they claim. Usually filled out by the employee as soon
as they are hired.
➢​ W-9 (Request for Taxpayers identification number and certification form)
❖​ Filled out by self-employed workers to the IRS to gather information about them. Those
working under this form are responsible to ensure that the correct amount of taxes are
being paid to the IRS because the company they are working for will not withhold taxes
for them.
➢​ 1099 tax form
❖​ Used to report to the IRS any non-salary income that an employer has paid to an
independent contractor for federal taxation purposes. Company pays more than $600
➢​ W-2 (Employee wage report form)
❖​ Reports the amount of money an employee has been paid and the amount of taxes being
withheld from their paycheck for a given year. Provided to employees to report their
income to the IRS.
●​ Lesson 2: Different Types of Equity and Accounting Equation Effects
-​ Types of Equity Accounts
➢​ Equity
❖​ A financial representation of ownership in a business
❖​ Shareholders Equity is comprised of multiple types
❖​ Equity stock vary and are used in different ways
❖​ Types:
1.​ Common Stock
➔​ Represents the owners and shareholder’s initial investment in ownership
of the business
➔​ Recorder at the par value of the stock
➔​ Face value of stock
 2.​ Preferred Stock
➔​ A type of share that does not offer voting rights in the company but does
guarantee cumulative dividends. Unpaid dividend accumulate until they
are paid off
3.​ Dividends > profit distribution to company shareholder
4.​ Contributed Surplus (Additional Paid-In Capital or APIC) > any investor
payment for the stock over the par value of the stock
5.​ Retained Earnings > the portion of the net income that has not been paid as
dividends to shareholders. Reinvested in the business
6.​ Treasury stock > a representation of the common stock that the company has
purchased back from investors. Recorded as a deduction from total equity
7.​ Other comprehensive income > income that has not yet been realized. Could
be gains or losses on investments that the company has available for sale
-​ Equity and Income Statements
➢​ Revenue > when revenue increases or decreases on the income statement it can affect retained
earnings
➢​ Retained Earnings > cumulative net earning after accounting for dividends. The company’s profit
was saved for future use. Recorded in shareholder’s equity in the balance sheet.

Domain 4: Reconciliation and Financial Statement

●​ Lesson 1: Account Reconciliation and Bank Recon Process
-​ Reconciliation Concepts
➢​ The process of determining if two sets of records match
➢​ Ensures there are no discrepancies between transactions and all records agree
➢​ Book V.S. Bank Balance Process:
❖​ Book Balance
➔​ Is the company’s cash balance as represented in its accounting records
➔​ These are recorded by the accountant
❖​ Bank Balance
➔​ Reflects the company’s cash position in its bank account
➔​ The bank’s record of transactions processed through the company’s account
➢​ Service charge is a fee charged to a company by the bank to recover the cost of processing a
transaction
➢​ Steps:
1.​ Enter the transactions up to the reconciliation date
2.​ Carefully go over the bank statement and match the transactions with the transactions
recorded in the books
3.​ Enter the missing transactions you found on your bank statement in the books
4.​ Do some additional research on the unreconciled transactions and make the appropriate
corrections through adjusting entries
5.​ Once the unreconciled items have been take care of and the books have been adjusted
to match the bank statement, the reconciliation process can be marked complete
6.​ Close the accounting period to prevent others from making changes
-​ Reconciliation Account Type
➢​ Typically done on the three balance sheet accounts, those accounts are reconciled because their
balances typically carry over to the next accounting period
➢​ These accounts are often reconciled with documents from external sources. Revenue and
expense are reconciled internally for accuracy
➢​ Accounts with additions or subtractions are reconcile at least once a year
➢​ Used to help prevent errors on financial statement and to verify the general ledger
➢​ Asset > bank, A/R, prepaid expense, inventory, and investment
➢​ Liab > A/P, accrued payroll, L/P, accrued liab, and taxes payable
➢​ Equity > common stock, preferred stock, contributed surplus, retained earnings and treasury
stock
-​ Reconciliation Document Types
➢​ Vendor statements
❖​ List your unpaid invoices
❖​ To ensure no mistakes were made in what the vendor is charging your company and the
product or service received from tem
➢​ Fixed asset schedules
❖​ Define company’s fixed assets, gross cost, depreciation and current book value.
❖​ Used to cross check the gross cost with fixed asset balance in general ledger.
➢​ Amortization Schedule
❖​ Lists the loan payment and breaks down the amount of interest versus principal
❖​ Includes payment, interest paid, principal, remaining loan balance
 ❖​ This helps companies see how much of the payment is going towards interest rather than
principal and how much remains to be paid
-​ Bank Reconciliation
➢​ Outstanding checks > check that the bank has not yet paid
➢​ Deposit in transit > receipts that a business receives for a deposit that the bank has not
deposited into the account within the same period
➢​ Duplicate entries > entries that have been added more than once
➢​ Non Sufficient fund (NSF) > checks that have been deposited while the issuer has NSF in their
account to cover the amount