Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Explaining the basic formula: Assets = Liabilities + Equity
- Understanding the fundamentals of the accounting equation
- Rules that dictate the equation
- Transaction examples



We looked at the financial accounting equation a bit when looking at assets, liabilities and equity, now let's break down the underlying concepts behind the equation. This equation is a true representation of the financial accounting elements recorded within the company.
 
Every transaction influences the financial position of the company. The financial accounting equation helps us to understand the need for accurate record-keeping as one transaction can affect two or more accounts. For example, when a company uses cash to purchase inventory, they are subtracting from their cash assets and their amount of inventory will subsequently increase.
 
We can virtually post every economic event that happens within a company in this one formula: Assets = Liabilities + Owners' Equity.



This equation reflects the fact that assets are acquired by taking on liabilities or increasing equity as a result of offering shares in the company. The reason that this equation exists is because we receive assets by taking on liabilities and retaining equity.
 
Assets are the largest amount as they are the sum of the debts and residual value. If liabilities held the most weight, the company would be in an extremely negative position. They would always be in debt and there would never be residual value left for the owners.



While we've seen the equation is fairly straightforward, there are two important things we must keep in mind. Here are the rules that apply to the financial accounting equation:
 
When performing the equation, it must always balance. This means that the left side of the equation (assets) must be equal to the right side (liabilities + equity). Although, keep in mind that just because the equation balances, that doesn't mean that all transactions are 100 percent accurate.
All transactions must be reflected within the equation, meaning all categories should be accounted for.



Here are three examples of how the accounting equation can be applied in the world of accounting:
 
Transaction Example 1
 
The company is purchasing a piece of property with cash for $260,000 and receiving an asset equated at $260,000. The cash is subtracted and an asset is added to the left side of the equation. This example only affected the Assets of the business so all transactions occurred on one side of the equation. If the company had acquired a note to pay for the property instead of using all cash then there would a been an entry on both sides of the equation.



Transaction Example 2 

The company is issuing common stock shares worth $200,000, which is recorded as an inflow of assets (cash) on the left side of the equation and on the right side of the equation they receive $200,000 in equity.



Transaction Example 3
 
An investment in the stock of another company is valued at $50,000, the cash is subtracted on the assets side while also adding in the asset of the $50,000 investment. An investment in another company is considered an asset to the purchasing company and is not reflected in the equity section of the equation.
 
As you can see, each example balances out on both sides. The double entry accounting system is reflected in these examples as the equation requires two or more entries to balance out. This doesn't need to be a truly symmetrical balance, in which each element is the same, but the amounts must balance on both sides.