Financial Accounting: Statements, Debits & Credits

Every transaction keeps the two sides in balance.

Debit increases: assets, expenses, dividends (draws). Credit increases: liabilities, equity, revenue.

Revenue: credit. Expense: debit.

Every transaction affects at least two accounts, and total debits always equal total credits.

Debit Equipment, credit Cash.

Debit Cash, credit Service Revenue.

Debit Supplies, credit Accounts Payable.

Debit Rent Expense, credit Cash.

Debit Cash, credit Unearned Revenue (a liability until the work is done).

Debit Cash, credit Common Stock.

Revenues minus expenses equals net income (or net loss) over a period of time.

Assets, liabilities and equity at a single point in time.

Beginning retained earnings + net income − dividends

Operating: day-to-day business cash Investing: buying and selling long-term assets Financing: borrowing, repaying debt, issuing stock, paying dividends

Income statement, then statement of retained earnings, then balance sheet, then statement of cash flows. Each uses a number from the one before (net income flows into retained earnings, which goes on the balance sheet).

Accrual: record revenue when earned and expenses when incurred, regardless of cash. Cash basis: record only when cash changes hands. GAAP requires accrual.

Record revenue when it is earned, and record expenses in the same period as the revenues they helped produce.

Accrued revenues (earned, not yet billed or received) Accrued expenses (incurred, not yet paid) Deferred (unearned) revenues being earned Prepaid expenses being used up (including depreciation)

\frac{\text{cost} - \text{salvage value}}{\text{useful life}} per year

Accumulated depreciation

A list of all accounts and their balances used to check that total debits equal total credits. It doesn't catch every error, such as an entry posted to the wrong account.

Temporary accounts: revenues, expenses and dividends, which are closed into retained earnings. Balance sheet (permanent) accounts are not closed.

Gross profit = net sales − cost of goods sold. Current ratio = current assets ÷ current liabilities.

LIFO gives higher cost of goods sold, lower net income and lower taxes. FIFO gives lower COGS, higher net income and an ending inventory closer to current cost. LIFO is not allowed under IFRS.

GAAP: US accounting rules, set by the Financial Accounting Standards Board (FASB). IFRS: international standards used in most other countries, set by the IASB.