1.01 STUDY GUIDE I. Accounting A. Accounting is the planning, recording, analyzing, and interpreting of financial information. B. An accounting system is the process for providing financial information that will be useful to management. II. Accounting Equation A. The accounting equation shows the relationship among assets, liabilities, and owner’s equity. It is most often stated as: Assets = Liabilities + Owner’s Equity 1. The accounting equation must be in balance. 2. The total of the amounts on the left side must always equal the total of the amounts on the right side. B. The values of all things owned (assets) are on the left side of the accounting equation. The values of all claims against the assets (liabilities and equities) (owner’s equity) are on the right side of the accounting equation. An accounting device used to analyze transactions is called a T-account. Assets = Liabilities + Owner’s Equity Left Side Debit Side Right Side Credit Side 1. An amount recorded on the left side is a debit 2. An amount recorded on the right side is a credit 3. The normal balance is the side of the account that is increased. Two basic accounting rules about increases and decreases of account balances are: a. Account balances increase on the normal balance side of the account. b. Account balances decrease on the side opposite the normal balance side of the account. C. Assets are on the left side of the accounting equation and have normal debit balances (left side). Liabilities are on the right side of the accounting equation and have normal credit balances (right side). The owner’s capital account is on the right side of the equation and has a normal credit balance (right side). D. Transactions are analyzed by asking four questions: 1. What accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 1.02 STUDY GUIDE I. Double-Entry Accounting A. Recording the debit and credit parts of a transaction is called double-entry accounting. 1. Every transaction affects at least two accounts. 2. Debits must equal credits. B. A journal is a form that is used to record transactions in chronological order. C. The process of recording the transactions in a journal is called journalizing. D. A journal that has two amount columns that can contain a variety of different transactions is called a general journal. E. An entry is recorded in the journal for each transaction. An entry consists of four parts: date, debit, credit, and source document. II. Source Documents A. Business papers that contain information that is needed to record journal entries 1. Check/Check stub – Orders a bank to pay cash from a bank account. It contains the date, amount, the name of the payee to whom the check was written and what the check purchased. The check stub is the record of information on a check and shows the balance of the account. 2. Invoice/Bill – Contains the date of the transaction, quantity, description and cost of each item and the payment terms. 3. Sales invoice – An invoice that is used to record a sale on account. 4. Receipt – Shows the date payment was made, the name of the person or business that paid and the amount paid. 5. Memorandum – Contains a brief message describing a transaction. Often used when there is no other type of source document. 6. Calculator tape/cash register tape – A calculator/cash register tape is used to calculate the total cash sales at the end of a day. B. An entry cannot be recorded unless there is a source document since the source document proves the transaction occurred. This is called the Objective Evidence accounting concept. 1.03 STUDY GUIDE I. Ethics is the study of right and wrong and how people choose what is morally good and bad. Business ethics refers to how a company uses a code of conduct, which is designed to encourage ideal behavior when reaching decisions. A. Three-step checklist for making ethical decisions 1. Is the action legal? 2. Does the action violate company code of conduct or professional standards? 3. Who is affected by this decision and how? B. Key principles for ethics in accounting 1. Integrity 2. Objectivity 3. Independence 4. Competence 5. Confidentiality II. Skills A. 21st Century Skills – Learning skills desired for the marketplace 1. Information and communication skills 2. Thinking and problem-solving skills 3. Interpersonal and self-directional skills B. Workplace skills – Skills directly related to employment 1. Resources 2. Information 3. Systems 4. Interpersonal skills 5. Technology C. Foundation skills – Personal qualities such as responsibility, integrity, and character 1. Basic skills 2. Thinking skills Key Principles For Ethics in Accounting Integrity: Accountants must choose between right and wrong. Accountants are responsible for entering correct entries. Accountants are responsible for true and correct financial statements. Integrity is necessary for accountants to build trust in regards to their professional judgments. Objectivity: Accountants must be: o Impartial o Honest o Free of personal conflicts Accountants must not be influenced by personal interests. Accountants should behave in a way that does not suggest inappropriateness. Independence: Accountants do not have an interest or profit financially from the companies they audit. Accountants must have the public’s confidence in their professional services. Competence: Accountants should be knowledgeable in their profession. Accountants must have the skills necessary to perform their jobs. Accountants must have experience in their field. Accountants are expected to keep abreast of current laws by continuing education classes. Confidentiality: Accountants must not share private information regarding their clients. Accountants are expected to protect personal and private information regarding their clients. An accountant should not use information learned for personal gain. 1.03 Accounting Workplace Skills 21st Century Skills: Learning skills desired for the marketplace Information and Communication Skills o Information and media literacy skills o Communication skills Thinking and Problem-Solving Skills o Critical thinking and systems thinking o Problem identification formulation and solution skills o Creativity and intellectual curiosity Interpersonal and Self-Directional Skills o Interpersonal and collaborative skills o Self-direction o Accountability and adaptability o Social responsibility Workplace skills: Skills directly related to employment Resources Information Systems Interpersonal skills Technology Foundation skills: Personal qualities such as responsibility, integrity, and character Basic Skills Thinking Skills