Principles of
FINANCIAL
ACCOUNTING
C h r i s t i n e J o n i c k , E d . D.
,1 Accounting Cycle for the Service
Business—Cash Basis
1.1 INTRODUCING ACCOUNTS AND BALANCES
Accounting may be defined as the process of analyzing, classifying, recording,
summarizing, and interpreting business transactions. One of the key aspects of the
process is keeping “running totals” of “things.” Examples of items a business might
keep track of include the amount of cash the business currently has, what a company
has paid for utilities for the month, the amount of money it owes, its income for
the entire year, and the total cost of all the equipment it has purchased. You want
to always have these running totals up to date so they are readily available to you
when you need the information. It is similar to checking what your cash balance
in the bank is when deciding if you have enough money to make a purchase with
your debit card.
We will now refer to these “running totals” as balances and these “things” as
accounts. Any item that a business is interested in keeping track of in terms of a
running dollar balance so it can determine “how much right now?” or “how much
so far?” is set up as an account. There are five types, or categories, of accounts.
WHAT IS A CATEGORY?
A category is a classification that generally describes its contents. The table
below shows three column headings in bold: Planets, Colors, and Food.
These are sample categories.
PLANETS COLORS FOOD
Saturn Red Pizza
Venus Green Brownies
Mars Yellow Chicken
Earth Blue Eggplant
Below each column heading is a list of four items that are actual examples
of items that fall into the respective category. If “Red” appeared under the
“Planets” heading, you would immediately assume there was an error. It does
not belong there.
Page | 1
,PRINCIPLES OF FINANCIAL ACCOUNTING ACCOUNTING CYCLE - SERVICE - CASH
There are many items that businesses keep records of. Each of these accounts
fall into one of five categories.
1. Assets: Anything of value that a business owns
2. Liabilities: Debts that a business owes; claims on assets by outsiders
3. Stockholders’ equity: Worth of the owners of a business; claims on
assets by the owners
4. Revenue: Income that results when a business operates and generates
sales
5. Expenses: Costs associated with earning revenue
Different accounts fall into different categories. Cash is an account that falls
in the asset category. The Cash account keeps track of the amount of money a
business has. Checks, money orders, and debit and credit cards are considered to
be cash.
Other than Cash, we will begin by covering accounts that fall into the revenue
and expense categories.
Revenue is income that results from a business engaging in the activities that
it is set up to do. For example, a computer technician earns revenue when they
repairs a computer for a customer. If the same computer technician sells a van that
they no longer needs for his business, it is not considered revenue.
Fees Earned is an account name commonly used to record income generated
from providing a service. In a service business, customers buy expertise, advice,
action, or an experience but do not purchase a physical product. Consultants, dry
cleaners, airlines, attorneys, and repair shops are service-oriented businesses. The
Fees Earned account falls into the revenue category.
Expenses are bills and other costs a business must pay in order for it to operate
and earn revenue. As the adage goes, “It takes money to make money.”
Expense accounts differ from business to business, depending on individual
company needs. The following are some common expenses that many businesses
have:
Wages Expense Cost of paying hourly employees
Rent Expense Cost for the use of property that belongs to someone else
Utilities Expense Costs such as electricity, water, phone, gas, cable TV, etc.
Supplies Expense Cost of small items used to run a business
Insurance Expense Cost of protection from liability, damage, injury, theft, etc.
Advertising Expense Cost of promoting the business
Maintenance Expense Costs related to repair and upkeep
Miscellaneous Expense Costs that are minor and/or non-repetitive
ANY Expense Any cost associated with earning revenue
Page | 2
, PRINCIPLES OF FINANCIAL ACCOUNTING ACCOUNTING CYCLE - SERVICE - CASH
A chart of accounts is a list of all accounts used by a business. Accounts are
presented by category in the following order: (1) Assets, (2) Liabilities, (3) Stock-
holders’ equity, (4) Revenue, and (5) Expenses.
CHART OF ACCOUNTS (PARTIAL)
The following table summarizes the categories and accounts discussed so far:
ASSETS REVENUE EXPENSES
Cash Fees Earned Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Advertising Expense
Miscellaneous Expense
1.2 NET INCOME—A CRITICAL AMOUNT
The difference between the total revenue and total expense amounts for a
particular period (such as a month or year), assuming revenue is higher, is profit.
We will now refer to profit as net income. The following is a key calculation in
determining a business’s operating results in dollars:
Revenue - Expenses = Net Income
Net income is determined by subtracting all expenses for a month (or year)
from all revenue for that same month (or year). A net loss results if total expenses
for a month (or year) exceed total revenue for the same period of time.
Net income is a result that business people are extremely interested in knowing
since it represents the results of a firm’s operations in a given period of time.
1.3 THE MECHANICS OF THE ACCOUNTING PROCESS
1.3.1 The Journal
Financial statements are key goals of the accounting process. In order to
prepare them at the end of an accounting period, individual financial transactions
must be analyzed, classified, and recorded all throughout the period. This initially
takes place in a record book called the journal, where financial events called
transactions are recorded as they happen, in chronological order.
Page | 3
FINANCIAL
ACCOUNTING
C h r i s t i n e J o n i c k , E d . D.
,1 Accounting Cycle for the Service
Business—Cash Basis
1.1 INTRODUCING ACCOUNTS AND BALANCES
Accounting may be defined as the process of analyzing, classifying, recording,
summarizing, and interpreting business transactions. One of the key aspects of the
process is keeping “running totals” of “things.” Examples of items a business might
keep track of include the amount of cash the business currently has, what a company
has paid for utilities for the month, the amount of money it owes, its income for
the entire year, and the total cost of all the equipment it has purchased. You want
to always have these running totals up to date so they are readily available to you
when you need the information. It is similar to checking what your cash balance
in the bank is when deciding if you have enough money to make a purchase with
your debit card.
We will now refer to these “running totals” as balances and these “things” as
accounts. Any item that a business is interested in keeping track of in terms of a
running dollar balance so it can determine “how much right now?” or “how much
so far?” is set up as an account. There are five types, or categories, of accounts.
WHAT IS A CATEGORY?
A category is a classification that generally describes its contents. The table
below shows three column headings in bold: Planets, Colors, and Food.
These are sample categories.
PLANETS COLORS FOOD
Saturn Red Pizza
Venus Green Brownies
Mars Yellow Chicken
Earth Blue Eggplant
Below each column heading is a list of four items that are actual examples
of items that fall into the respective category. If “Red” appeared under the
“Planets” heading, you would immediately assume there was an error. It does
not belong there.
Page | 1
,PRINCIPLES OF FINANCIAL ACCOUNTING ACCOUNTING CYCLE - SERVICE - CASH
There are many items that businesses keep records of. Each of these accounts
fall into one of five categories.
1. Assets: Anything of value that a business owns
2. Liabilities: Debts that a business owes; claims on assets by outsiders
3. Stockholders’ equity: Worth of the owners of a business; claims on
assets by the owners
4. Revenue: Income that results when a business operates and generates
sales
5. Expenses: Costs associated with earning revenue
Different accounts fall into different categories. Cash is an account that falls
in the asset category. The Cash account keeps track of the amount of money a
business has. Checks, money orders, and debit and credit cards are considered to
be cash.
Other than Cash, we will begin by covering accounts that fall into the revenue
and expense categories.
Revenue is income that results from a business engaging in the activities that
it is set up to do. For example, a computer technician earns revenue when they
repairs a computer for a customer. If the same computer technician sells a van that
they no longer needs for his business, it is not considered revenue.
Fees Earned is an account name commonly used to record income generated
from providing a service. In a service business, customers buy expertise, advice,
action, or an experience but do not purchase a physical product. Consultants, dry
cleaners, airlines, attorneys, and repair shops are service-oriented businesses. The
Fees Earned account falls into the revenue category.
Expenses are bills and other costs a business must pay in order for it to operate
and earn revenue. As the adage goes, “It takes money to make money.”
Expense accounts differ from business to business, depending on individual
company needs. The following are some common expenses that many businesses
have:
Wages Expense Cost of paying hourly employees
Rent Expense Cost for the use of property that belongs to someone else
Utilities Expense Costs such as electricity, water, phone, gas, cable TV, etc.
Supplies Expense Cost of small items used to run a business
Insurance Expense Cost of protection from liability, damage, injury, theft, etc.
Advertising Expense Cost of promoting the business
Maintenance Expense Costs related to repair and upkeep
Miscellaneous Expense Costs that are minor and/or non-repetitive
ANY Expense Any cost associated with earning revenue
Page | 2
, PRINCIPLES OF FINANCIAL ACCOUNTING ACCOUNTING CYCLE - SERVICE - CASH
A chart of accounts is a list of all accounts used by a business. Accounts are
presented by category in the following order: (1) Assets, (2) Liabilities, (3) Stock-
holders’ equity, (4) Revenue, and (5) Expenses.
CHART OF ACCOUNTS (PARTIAL)
The following table summarizes the categories and accounts discussed so far:
ASSETS REVENUE EXPENSES
Cash Fees Earned Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Advertising Expense
Miscellaneous Expense
1.2 NET INCOME—A CRITICAL AMOUNT
The difference between the total revenue and total expense amounts for a
particular period (such as a month or year), assuming revenue is higher, is profit.
We will now refer to profit as net income. The following is a key calculation in
determining a business’s operating results in dollars:
Revenue - Expenses = Net Income
Net income is determined by subtracting all expenses for a month (or year)
from all revenue for that same month (or year). A net loss results if total expenses
for a month (or year) exceed total revenue for the same period of time.
Net income is a result that business people are extremely interested in knowing
since it represents the results of a firm’s operations in a given period of time.
1.3 THE MECHANICS OF THE ACCOUNTING PROCESS
1.3.1 The Journal
Financial statements are key goals of the accounting process. In order to
prepare them at the end of an accounting period, individual financial transactions
must be analyzed, classified, and recorded all throughout the period. This initially
takes place in a record book called the journal, where financial events called
transactions are recorded as they happen, in chronological order.
Page | 3
