ACCOUNTING BASICS by Susan Crosson

 
ACCOUNTING EQUATION:
Assets =
Liabilities +
Owners Equities +
Revenues --
Expenses
My Definition:
Something that has future or potential value
"resources"
Responsibilities to others
"payables"
"unearned"
Internal and External ownership
Recognition of value creation
Expired, used, or consumed costs or resources
Debit Rules:
Dr
Increase
Decrease
Decrease
Decrease
Increase
Credit Rules:
Cr
Decrease
Increase
Increase
Increase
Decrease
Account Types and Examples: Current Assets:
Cash, Marketable Securities, Accounts Receivable, Inventory, Prepaids
Plant Assets:
Land, Buildings, Equipment, Accumulated Depreciation
Noncurrent Assets:
Investments, Intangibles
Current Liabilities:
Accounts Payable, Unearned Revenue, Advances from Customers
Noncurrent or Long-term Liabilities:
Bonds Payable, Notes Payable, Mortgages Payable
Sole Proprietor (both internal and external):
Name, Capital; Name, Withdrawals
Partnership (both internal and external): Partner A, Capital; Partner A, Withdrawals, etc.
Corporation:
External: Common Stock, Preferred Stock, Paid in Capital
Internal: Retained Earnings, Dividends
OperatingRevenue:
Sales, Fees Earned, Rent Income, Contract Revenue
Other Revenue:
Interest Income
Product/Service Expenses:
Cost of Goods Sold, Cost of Sales
Period Expenses:
Selling Expense, Administrative Expense, General Expense, Salary Expense, Rent Expense, Depreciation Expense, Insurance Expense
Other Expenses:
Interest Expense
T-account Rules:
Assets

*Acquire resources







Debit
decrease

*Consume resources

 






Credit
decrease

Liabilities

*Pay bills
*Recognize earnings

 




Debit
decrease

*Buy on credit
*Receive cash or other assets before earning it


Credit
increase

Owners Equity

*Internal
Net Loss
*External
Owners reduce ownership thru withdrawals or dividends

Debit
decrease

*Internal
Net Income
*External
Investment made by owners in company


Credit
increase


Revenues

*Sales returned
*Sales discount given

 



Debit
decrease

*Sales
*Earned
*Income

 

 



Credit
increase

Expenses

Resources
*Used
*Consumed
*Expired






Debit

increase

 

 

 




Credit
decrease

 
Basic Financial Statement Rules:

Balance Sheet
A=L+OE
(Prepare third)

Income Statement
R-E=Net Income (NI) or Loss (NL)
(Prepare first)
Statement of Cash Flows
Operating+/-Investing+/-Financing+Beginning Cash=Ending Cash
(Prepare last)
Statement of Equity
Beginning* +NI or -NL-(Dividends or Withdrawals)=Ending*
*for Sole Proprietors and Partnerships use "Capital;
for Corporations use "Retained Earnings"
(Prepare second)
 
Cash Flow Statement Preparation Steps for
Indirect Method:
Step 1
Income Statement
Step 2
Balance Sheet:
Changes* in Current Assets and Current Liabilities
Step 3
Balance Sheet:
Changes* in Noncurrent Assets
Step 4
Balance Sheet:
Changes* in Long-term Liabilities and Owners Equities
Step 5
Compute Subtotals, Add to Beginning Cash to Equal Ending Cash
 
*Change= Ending Account Balance-Beginning Account Balance
Operating
Operating Income
+Depreciation Expense
+Losses on Sales of Noncurrent Assets
-Gains on Sales of NoncurrentAssets
+Decreases in Current Assets
+Increases in Current Liabilities
-Increases in Current Assets
-Decreases in Current Liabilities
    Equals
Cash from Operating Activities
Investing    

Analyze account changes separately!
+Cash provided from Decreases
-Cash used for Increases

  Equals
Cash from Investing Activities
Financing  

 
Analyze account changes separately!
+Cash provided from Increases
-Cash used for Decreases
Remember Owners Equity change due to Operating Income is already in Operating Activities
Equals
Cash From Financing Activities
Cash Flow Recap:
Cash from Operations +
Cash from Investing Activities+
Cash from Financing Activities+
+ Beginning Cash
= Ending Cash
 

The Accounting Cycle:

1. Recognize Transaction
2. Record transaction in a Journal Entry
3. Post Journal Entry to Ledger
4. Prepare Trial Balance to confirm DR=Cr
5. Record Adjusting Entries in Journal and Post to Ledger
6. Prepare Adjusted Trial Balance to confirm DR=Cr
7. Prepare Financial Statements: IS, OE, BS, CF
7. Record Closing Entries in Journal and Post to Ledger
8. Prepare Post-Closing Trial Balance

 
Other Must Knows!
Accounting Concepts
Financial Statement Ratios
Adjusting and Closing Entries
Cost of Sales Computation for Service, Merchandising, and Manufacturing Businesses
Review Overhead Rates
Straight Line and Accelerated Depreciation Methods and Calculations for Plant Assets
FIFO, LIFO, and Average Cost Methods and Calculations for Periodic and Perpetual Inventory