SUMMARY OF ACCOUNTING BASICS

SUMMARY OF ACCOUNTING BASICS

Classification of Accounts

Account Title	Account Classification	Normal Balance	Financial 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)     Sold	Cost of merchandise    (goods sold)	Debit	Income statement
Deferred Income Tax	Current liability/Long-    term liability	Credit	Balance sheet
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    Payable	Current liability	Credit	Balance sheet
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    Payable	Current liability	Credit	Balance sheet
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 Title	Account Classification	Normal Balance	Financial Statement
Materials	Current asset	Debit	Balance sheet
Merchandise Inventory	Current asset/Cost of    merchandise sold	Debit	Balance sheet/Income    statement
Notes Payable	Current liability/Long-    term liability	Credit	Balance sheet
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    Treasury Stock	Stockholders’ equity	Credit	Balance sheet
Paid-in Capital in Excess of    Par (Stated Value)	Stockholders’ equity	Credit	Balance sheet
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    sold	Debit	Income statement
Purchases Discounts	Cost of merchandise    sold	Credit	Income statement
Purchases Returns and    Allowances	Cost of merchandise    sold	Credit	Income statement
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    sold	Debit	Income statement
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-    term liability	Credit	Balance sheet
Work In Process	Current asset	Debit	Balance sheet

The Basics

1.  Accounting Equation:

               Assets = Liabilities + Owner’s Equity

2.  T Account:

Account Title

Left Side debit

Right Side credit

3.  Rules of Debit and Credit:

Balance Sheet Accounts
ASSETS Asset Accounts		LIABILITIES Liability Accounts
Debit for increases	Credit for decreases	Debit for decreases	Credit for increases
		OWNER’S EQUITY Owner’s Equity Accounts
		Debit for decreases	Credit for increases
Income Statement Accounts
Debit  for decreases in owner’s equity Expense Accounts		Credit for increases in owner’s equity Revenue Accounts
Debit for increases	Credit for decreases	Debit for decreases	Credit for increases

Normal Balance

4.  To Analyze a Transaction:

1.  Determine whether an asset, a liability, owner’s   

     equality, revenue, or expense account is affected by 

     the transaction.

2.  For each account affected by the transaction, 

     determine whether the account increases or

     decreases.

3.  Determine whether each increase or decrease should

     be recorded as a debit or a credit.

5.  Financial Statements:

INCOME STATEMENT

A summary of the revenue and the expense of a business entity for a specific period of time, such as a month or a year.

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 owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year.

STATEMENT OF CASH FLOWS

A summary of  the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year.

6.  Accounting Cycle:

1.  Analyze and record transactions in journal.

2.  Post transactions to ledger.

3.  Prepare trial balance, assemble adjustment data, and

     complete worksheet.                

4.  Prepare financial statements.

5.  Journalize and post adjusting entries.

6.  Journalize and post closing entries.

7.  Prepare post-closing trial balance.

7.  Types of Adjusting Entries:

      1.  Deferred expense (prepaid expense)

      2.  Deferred revenue (unearned revenue)

      3.  Accrued expense (accrued liability)

      4.  Accrued revenue (accrued asset)

      5.  Depreciation expense

Each entry will always affect both a balance sheet and an

income statement account.

8.  Closing Entries:

      1.  Transfer revenue account balances to Income

           Summary.

      2.  Transfer expense account balances to Income

           Summary.

      3.  Transfer Income Summary balance to Retained

           Earnings.

      4.  Transfer dividends account balance to Retained

           Earnings.

9.  Special Journals

      Rendering of services

        on account à recorded in à Revenue (sales) journal

      Receipt of cash from

         any source à recorded in à Cash receipts journal

      Purchasing of items

         on account à recorded in à Purchases journal

      Payments of cash for

         any purpose à recorded in à Cash payments journal

10. Shipping Terms

	FOB  Shipping Point	FOB Destination
Ownership (title) passes to buyer  when merchandise is …….	delivered to freight carrier	delivered to buyer

Transportation costs

are paid by:                       buyer                         seller

       

                             

              

11.  Format for Bank Reconciliation:

Cash balance according to bank statement….		$xxx
Add:   Additions by depositor not on bank             statement………………………	$xx
Bank errors………………………………...	xx	xx $xxx
Deduct:  Deductions by depositor not on                bank statement…………………….	$xx
Bank errors………………………………. Adjusted balance…………………………….	xx	xx $xxx
Cash balance according to depositor’s records..		$xxx
Add:  Additions by bank not recorded by depositor……………………………………….	$xx
Depositor errors……………………………..	xx	xx
		$xxx
Deduct:  Deductions by bank not recorded                by depositor………………………….	$xx
Depositor errors……………………………..	xx	xx
Adjusted balance………………………………		$xxx

12.  Inventory Costing Methods

  1.  First-in, First-out (fifo)

  2.  Last-in, First-out (lifo)

  3.  Average Cost

13.  Interest Computations:

        Interest = Face Amount (or Principal) x Rate x Time

14.  Methods of Determining Annual Depreciation:

STRAIGHT-LINE:  Cost-Estimated Residual Value

                                            Estimated Life

DECLINING-BALANCE: Rate*xBook Value at

                                             Beginning of Period

               *Rate is commonly twice the straight-line

                 rate (1 ¸ Estimated Life).

15.  Cash Provided by Operations on Statement of Cash

       Flows (indirect method):

Net income, per income statement…………….		$xx
Add:  Depreciation of plant assets……………..	$xx
Amortization of bond payable discount             and intangible assets……………………	xx
Decreases in current assets (receivables,             inventories, prepaid expenses)…………	xx
Increases in current liabilities (accounts             and notes payable, accrued liabilities)…	xx
Losses on disposal of assets and retirement            of debt…………………………………..	xx	xx
Deduct:  Amortization of bond payable                   premium……………………………	$xx
Increases in current assets (receivables,                  inventories, prepaid expenses)……...	xx
Decreases in current liabilities (accounts               and notes payable, accrued liabilities)..	xx
Gains on disposal of assets and               retirement of debt……………………..	xx	xx
Net cash flow from operating activities………..		$xx

16.  Contribution Margin Ratio = Sales-Variable Costs                             

                                                              Sales

17.  Break-Even Sales (Units) =        Fixed Costs_______                       

                                                 Unit Contribution Margin

18.  Sales (Units) = Fixed Costs + Target Profit

                               Unit Contribution Margin

19.  Margin of Safety = Sales-Sales at Break-Even Point

                                                            Sales

20.  Operating Leverage = Contribution Margin

                                              Operating Income

21.  Variances

Direct Materials=Actual  Price per Unit- x Actual Quantity

 Price Variance        Standard Price                     Used

   Direct Materials=Actual Quantity Used- x Standard Price

Quantity Variance       Standard Rate                  per unit

  Direct Labor = Actual Rate Per Hour –  x Actual Hours

Rate Variance         Standard Rate                   Worked

   Direct Labor = Actual Hours Worked-  x Standard Rate

Time Variance         Standard Hours               per Hour

    Variable Factory             Actual             Budged Variable

Overhead Controllable=Variable Factory -         Factory

         Variance                    Overhead              Overhead for

                                                                   Actual Amount

                                                                      Produced

    Fixed Factory            100% of Normal         Std. Fixed

Overhead Volume = Capacity-Std. Capacity  x   Factory

      Variance              for Amount Produced      Overhead

                                                                           Rate

22.  Rate of Return on = Controllable Operating Income

       Investment (ROI)                Invested Assets

Alternative ROI Computation:

ROI = Controllable Operating Income x         Sales____

                                 Sales                        Invested Assets

23.  Capital Investment Analysis Methods:

1.  Methods that Ignore Present Values:

     A.  Average Rate of Return Method

     B.  Cash Payback Method

2.  Methods That Use Present Values:

     A.  Net Present Value Method

     B.  Internal Rate of Return Method

24.  Average Rate =  Estimated Average Annual Income

        of Return                       Average Investment

25.  Present Value Index =

        Total Present Value of Net Cash Flow

                 Amount to be invested

26.  Present Value Factor =     Amount to Be Invested___

        for an Annuity of $1    Equal Annual Net Cash Flows