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SUMMARY OF ACCOUNTING BASICS

Classification of Accounts

Account Account Normal Financial


Title Classification Balance Statement
Accounts Payable Current liability Credit Balance sheet
Accounts Receivable Current asset Debit Balance sheet
Accumulated Depreciation Plant asset Credit Balance sheet
Accumulated Depletion Plant asset Credit Balance sheet
Advertising Expense Operating expense Debit Income statement
Allowance for Doubtful Accounts Current asset Credit Balance sheet
Amortization Expense Operating expense Debit Income statement
Appropriation for __________ Stockholders equity Credit Retained earnings statement/
Balance sheet
Bonds Payable Long-term liability Credit Balance sheet
Building Plant asset Debit Balance sheet
Capital Stock Stockholders equity Credit Balance sheet
Cash Current asset Debit Balance sheet
Cash Dividends Stockholders equity Debit Retained earnings statement
Cash Dividends payable Current liability Credit Balance sheet
Common Stock Stockholders equity Credit Balance sheet
Cost of Merchandise (Goods) Cost of merchandise Debit Income statement
Sold (goods sold)
Deferred Income Tax Current liability/Long- Credit Balance sheet
term liability
Depletion Expense Operating expense Debit Income statement
Discount on Bonds Payable Long-term liability Debit Balance sheet
Discounts Lost Other expense Debit Income statement
Dividend Income Other income Credit Income statement
Dividends Stockholders equity Debit Retained earnings statement
Donated Capital Stockholders equity Credit Balance sheet
Employees Federal Income Tax Current liability Credit Balance sheet
Payable
Equipment Plant asset Debit Balance sheet
Exchange Gain Other income Credit Income statement
Exchange Loss Other expense Debit Income statement
Factory Overhead (Overapplied) Deferred credit Credit Balance sheet (interim)
Factory Overhead (Underapplied) Deferred debit Debit Balance sheet (interim
Federal Income Tax Payable Current liability Credit Balance sheet
Federal Unemployment Tax Current liability Credit Balance sheet
Payable
FICA Tax Payable Current liability Credit Balance sheet
Finished Goods Current asset Debit Balance sheet
Gain on Disposal of Plant Assets Other income Credit Income statement
Gain on Redemption of Bonds Extraordinary item Credit Income statement
Gain on Sale of Investments Other income Credit Income statement
Goodwill Intangible asset Debit Balance sheet
Income Tax Income tax Debit Income statement
Income Tax Payable Current liability Credit Balance sheet
Insurance Expense Operating expense Debit Income statement
Interest Expense Other expense Debit Income statement
Interest Income Other income Credit Income statement
Interest Receivable Current asset Debit Balance sheet
Investment in Bonds Investment Debit Balance sheet
Investment in Stocks Investment Debit Balance sheet
Investment in Subsidiary Investment Debit Balance sheet
Land Plant asset Debit Balance sheet
Loss on Disposal of Plant Assets Other expense Debit Income statement
Loss on Redemption Bonds Extraordinary item Debit Income statement
Loss on Sale of Investments Other expense Debit Income statement
Marketable Securities Current asset Debit Balance sheet
Account Account Normal Financial
Title Classification Balance Statement
Materials Current asset Debit Balance sheet
Merchandise Inventory Current asset/Cost of Debit Balance sheet/Income
merchandise sold statement
Notes Payable Current liability/Long- Credit Balance sheet
term liability
Notes Receivable Current asset/Investment Debit Balance sheet
Organization Costs Intangible asset Debit Balance sheet
Patents Intangible asset Debit Balance sheet
Paid-in Capital from Sale of Stockholders equity Credit Balance sheet
Treasury Stock
Paid-in Capital in Excess of Stockholders equity Credit Balance sheet
Par (Stated Value)
Payroll Tax Expense Operating expense Debit Income statement
Pension Expense Operating expense Debit Income statement
Petty cash Current asset Debit Balance sheet
Premium on Bonds Payable Long-term liability Credit Balance sheet
Prepaid Insurance Current asset Debit Balance sheet
Prepaid Rent Current asset Debit Balance sheet
Preferred Stock Stockholders equity Credit Balance sheet
Purchases Cost of merchandise Debit Income statement
sold
Purchases Discounts Cost of merchandise Credit Income statement
sold
Purchases Returns and Cost of merchandise Credit Income statement
Allowances sold
Rent Expense Operating expense Debit Income statement
Rent Income Other income Credit Income statement
Retained Earnings Stockholders equity Credit Balance sheet/Retained
earnings statement
Salaries Expense Operating expense Debit Income statement
Salaries Payable Current liability Credit Balance sheet
Sales Revenue from sales Credit Income statement
Sales Discounts Revenue from sales Debit Income statement
Sales Returns and Allowances Revenue from sales Debit Income statement
Sales Tax Payable Current liability Credit Balance sheet
Sinking Fund Cash Investment Debit Balance sheet
Sinking Fund Investments Investment Debit Balance sheet
State Unemployment Tax Payable Current liability Credit Balance sheet
Stock Dividends Stockholders equity Debit Retained earnings statement
Stock Dividends Distributable Stockholders equity Credit Balance sheet
Supplies Current asset Debit Balance sheet
Supplies Expense Operating expense Debit Income statement
Transportation In Cost of merchandise Debit Income statement
sold
Treasury Stock Stockholders equity Debit Balance sheet
Uncollectible Accounts Expense Operating expense Debit Income statement
Unearned Rent Current liability Credit Balance sheet
Utilities Expense Operating expense Debit Income statement
Vacation Pay Expenses Operating expense Debit Income statement
Vacation Pay Payable Current liability/long- Credit Balance sheet
term liability
Work In Process Current asset Debit Balance sheet
The Basics STATEMENT OF CASH FLOWS
A summary of the cash receipts and cash payments of a
1. Accounting Equation: business entity for a specific period of time, such as a
Assets = Liabilities + Owners Equity month or a year.

2. T Account: 6. Accounting Cycle:


1. Analyze and record transactions in journal.
Account Title 2. Post transactions to ledger.
Left Side Right Side 3. Prepare trial balance, assemble adjustment data, and
debit credit complete worksheet.
4. Prepare financial statements.
3. Rules of Debit and Credit: 5. Journalize and post adjusting entries.
6. Journalize and post closing entries.
7. Prepare post-closing trial balance.
Balance Sheet Accounts
ASSETS LIABILITIES
7. Types of Adjusting Entries:
Asset Accounts Liability Accounts
1. Deferred expense (prepaid expense)
Debit Credit Debit Credit
2. Deferred revenue (unearned revenue)
for for for for
3. Accrued expense (accrued liability)
increases decreases decreases increases
4. Accrued revenue (accrued asset)
5. Depreciation expense
OWNERS EQUITY
Owners Equity Accounts Each entry will always affect both a balance sheet and an
Debit Credit income statement account.
for for
decreases increases 8. Closing Entries:
1. Transfer revenue account balances to Income
Income Statement Accounts Summary.
Debit for Credit for 2. Transfer expense account balances to Income
decreases in owners equity increases in owners equity Summary.
3. Transfer Income Summary balance to Retained
Expense Accounts Revenue Accounts Earnings.
Debit Credit Debit Credit 4. Transfer dividends account balance to Retained
for for for for Earnings.
increases decreases decreases increases
9. Special Journals
Normal Balance Rendering of services
on account recorded in Revenue (sales) journal
4. To Analyze a Transaction: Receipt of cash from
1. Determine whether an asset, a liability, owners any source recorded in Cash receipts journal
equality, revenue, or expense account is affected by Purchasing of items
the transaction. on account recorded in Purchases journal
2. For each account affected by the transaction, Payments of cash for
determine whether the account increases or any purpose recorded in Cash payments journal
decreases.
3. Determine whether each increase or decrease should 10. Shipping Terms
be recorded as a debit or a credit. FOB Shipping FOB
Point Destination
5. Financial Statements: Ownership (title)
passes to buyer when
INCOME STATEMENT merchandise is . delivered to freight delivered to
A summary of the revenue and the expense of a business carrier buyer
entity for a specific period of time, such as a month or a
year. Transportation costs
are paid by: buyer seller
RETAINED EARNINGS STATEMENT
A summary of the changes in the earnings retained in a
business entity for a specific period of time, such as a
month or a year.

BALANCE SHEET
A list of the assets, liabilities, and owners equity of a
business entity as of a specific date, usually at the close of
the last day of a month or a year.
16. Contribution Margin Ratio = Sales-Variable Costs
11. Format for Bank Reconciliation: Sales

Cash balance according to bank statement. $xxx 17. Break-Even Sales (Units) = Fixed Costs_______
Add: Additions by depositor not on bank Unit Contribution Margin
statement $xx
Bank errors... xx xx 18. Sales (Units) = Fixed Costs + Target Profit
$xxx Unit Contribution Margin
Deduct: Deductions by depositor not on
bank statement. $xx 19. Margin of Safety = Sales-Sales at Break-Even Point
Bank errors. xx xx Sales
Adjusted balance. $xxx
20. Operating Leverage = Contribution Margin
Cash balance according to depositors records.. $xxx Operating Income
Add: Additions by bank not recorded by
depositor. $xx 21. Variances
Depositor errors.. xx xx
$xxx Direct Materials=Actual Price per Unit- x Actual Quantity
Deduct: Deductions by bank not recorded Price Variance Standard Price Used
by depositor. $xx
Depositor errors.. xx xx Direct Materials=Actual Quantity Used- x Standard Price
Adjusted balance $xxx
Quantity Variance Standard Rate per unit
12. Inventory Costing Methods
Direct Labor = Actual Rate Per Hour x Actual Hours
1. First-in, First-out (fifo)
Rate Variance Standard Rate Worked
2. Last-in, First-out (lifo)
3. Average Cost
Direct Labor = Actual Hours Worked- x Standard Rate
Time Variance Standard Hours per Hour
13. Interest Computations:
Interest = Face Amount (or Principal) x Rate x Time
Variable Factory Actual Budged Variable
Overhead Controllable=Variable Factory - Factory
14. Methods of Determining Annual Depreciation:
Variance Overhead Overhead for
STRAIGHT-LINE: Cost-Estimated Residual Value
Actual Amount
Estimated Life
Produced
DECLINING-BALANCE: Rate*xBook Value at
Fixed Factory 100% of Normal Std. Fixed
Beginning of Period
Overhead Volume = Capacity-Std. Capacity x Factory
Variance for Amount Produced Overhead
*Rate is commonly twice the straight-line
Rate
rate (1 Estimated Life).
22. Rate of Return on = Controllable Operating Income
15. Cash Provided by Operations on Statement of Cash Investment (ROI) Invested Assets
Flows (indirect method):
Alternative ROI Computation:
Net income, per income statement. $xx
Add: Depreciation of plant assets.. $xx ROI = Controllable Operating Income x Sales____
Amortization of bond payable discount Sales Invested Assets
and intangible assets xx
Decreases in current assets (receivables, 23. Capital Investment Analysis Methods:
inventories, prepaid expenses) xx 1. Methods that Ignore Present Values:
Increases in current liabilities (accounts A. Average Rate of Return Method
and notes payable, accrued liabilities) xx B. Cash Payback Method
Losses on disposal of assets and retirement 2. Methods That Use Present Values:
of debt.. xx xx A. Net Present Value Method
Deduct: Amortization of bond payable B. Internal Rate of Return Method
premium $xx
Increases in current assets (receivables, 24. Average Rate = Estimated Average Annual Income
inventories, prepaid expenses)... xx of Return Average Investment
Decreases in current liabilities (accounts
and notes payable, accrued liabilities).. xx 25. Present Value Index =
Gains on disposal of assets and Total Present Value of Net Cash Flow
retirement of debt.. xx xx Amount to be invested
Net cash flow from operating activities.. $xx
26. Present Value Factor = Amount to Be Invested___
for an Annuity of $1 Equal Annual Net Cash Flows