ACCOUNTING

CHEAT SHEET
INTRODUCTION TO ACCOUNTING
Accounting is the process of recording, classifying, and
summarizing financial transactions to provide
information that is useful in making business decisions.
It's like keeping a detailed diary of a company's money.

Key points:
Accounting helps track money coming in and going out
It provides a clear picture of a company's financial
health
Accountants use this information to create reports for
business owners and investors
BASIC ACCOUNTING PRINCIPLES
ACCOUNTING FOLLOWS SOME BASIC RULES TO MAKE SURE EVERYONE
DOES IT THE SAME WAY. THESE RULES ARE CALLED PRINCIPLES.

Revenue Recognition: Record money when you earn it, not

when you receive it.
Matching: Match expenses with the income they help
create.
Cost Principle: Record things at their original cost.
Going Concern: Assume the business will continue
operating.
Consistency: Use the same accounting methods over time.
Full Disclosure Principle: All relevant financial information
should be disclosed in financial statements.
Conservatism Principle: When in doubt, report lower profits
and higher losses.
Materiality Principle: Only include information that could
influence the decision-making of users.
Monetary Unit Principle: Record transactions that can be
measured in a consistent currency.
Time Period Principle: Financial reporting should be done
for specific, consistent periods (e.g., monthly, annually).
 THE ACCOUNTING EQUATION
The accounting equation is the foundation of all accounting. It shows the
relationship between a company's assets, liabilities, and owner's equity.

ASSETS = LIABILITIES + OWNER'S EQUITY

Assets: Things the company owns (e.g., cash, inventory,

equipment)
Liabilities: What the company owes to others (e.g., loans,
bills to pay)
Owner's Equity: The owner's investment in the business
plus profits kept in the business
THIS EQUATION MUST ALWAYS BALANCE, JUST LIKE A SCALE.
 BASIC ACCOUNTING TERMS
Asset: Anything the business owns that has value (e.g.,
cash, buildings, inventory).
Liability: Money the business owes to others (e.g., loans,
unpaid bills).
Equity: The owner’s share in the business, after all liabilities
are paid off.
Revenue: The money a business earns from selling goods
or services.
Expense: The money spent by the business to run
operations (e.g., rent, salaries).
Profit: The amount left after subtracting all expenses from
revenue (Revenue - Expenses = Profit).
Loss: When expenses are more than the revenue earned.
Journal: A record where business transactions are first
written down.
Ledger: A book where all journal entries are classified into
individual accounts.
Trial Balance: A report that lists all accounts and their
balances, used to check if debits and credits match.
BASIC ACCOUNTING TERMS
Balance Sheet: A financial statement that shows the
company's assets, liabilities, and equity at a specific time.
Income Statement: A financial report showing the
company's revenue and expenses over a period, also
known as a profit and loss statement.
Debit: An entry on the left side of an account, usually
showing an increase in assets or expenses.
Credit: An entry on the right side of an account, usually
showing an increase in liabilities or income.
BASIC ACCOUNTING TERMS
Capital: Money or assets invested by the owner in the
business.
Accounts Payable (AP): The amount a business owes to
suppliers or creditors (liabilities).
Accounts Receivable (AR): Money owed to the business by
customers who bought goods or services on credit
(assets).
Accrual: Recording income and expenses when they are
earned or incurred, not when cash is exchanged.
Depreciation: The reduction in value of an asset over time
due to wear and tear (e.g., machinery).
Amortization: Similar to depreciation, but it refers to
gradually writing off intangible assets (e.g., patents,
goodwill).
Inventory: Goods or materials a business holds for the
purpose of sale.
Liquidity: How easily an asset can be converted into cash
(cash is the most liquid asset).
Dividend: A portion of a company’s earnings paid to
shareholders, usually in cash.
BASIC ACCOUNTING TERMS
Fiscal Year: A 12-month period used for accounting
purposes, which may or may not align with the calendar
year.
Retained Earnings: The accumulated profits that a company
has kept (not distributed as dividends) over time.
Cost of Goods Sold (COGS): The direct costs of producing
goods sold by a company (e.g., materials, labor).
Current Assets: Assets that are expected to be converted to
cash within one year (e.g., cash, accounts receivable).
Current Liabilities: Debts or obligations due within one year
(e.g., short-term loans, accounts payable).
Fixed Assets: Long-term assets that a company uses in its
operations, like buildings and equipment.
Net Worth: The total value of a company’s assets minus its
liabilities (same as equity).
Overheads: Ongoing business expenses not directly linked
to producing goods or services (e.g., rent, utilities).
Working Capital: The difference between current assets and
current liabilities, showing short-term financial health.
Provision: Money set aside to cover future expenses, such
as taxes or repairs.
DEBITS AND CREDITS
Debits and credits are the tools accountants use to record
transactions. They're like the plus and minus of accounting,
but with a twist.

Key points:
Every transaction affects at least two accounts
One account is debited, another is credited
Debits and credits have different effects on different
types of accounts
EFFECTS OF DEBITS AND CREDITS:
Assets: Debit to increase, Credit to decrease
Liabilities and Equity: Credit to increase, Debit to
decrease
Revenue: Credit to increase, Debit to decrease
Expenses: Debit to increase, Credit to decrease

Remember: The total debits must always equal the total

credits in any transaction.
TYPES OF ACCOUNTS
PERSONAL ACCOUNT:
Personal accounts relate to individuals, companies, or
other entities with which the business has transactions.

RULE:
Debit the receiver (if someone is getting something).
Credit the giver (if someone is giving something).

EXAMPLES:
Customer accounts
Supplier accounts
Employee accounts
Shareholder accounts
Debtor accounts
Creditor accounts
 REAL ACCOUNT:
Real accounts represent assets and liabilities of a business.
They are permanent accounts that carry forward their
balances to the next accounting period.

RULE:
Debit what comes in (when you get something).
Credit what goes out (when you give something).

EXAMPLES:
Cash account
Inventory account
Equipment account
Building account
Accounts receivable
Accounts payable
Loans payable
NOMINAL ACCOUNT:
Nominal accounts represent income, expenses, gains, and
losses. They are temporary accounts that are closed at the
end of each accounting period.

RULE:
Debit all expenses and losses (when you spend or
lose money).
Credit all incomes and gains (when you earn or
make profit).

EXAMPLES:
Sales account
Rent expense account
Salary expense account
Interest income account
DOUBLE-ENTRY BOOKKEEPING
Double-entry bookkeeping is a system where every
transaction is recorded in at least two accounts. This
helps ensure accuracy and provides a complete picture
of each transaction.

KEY POINTS:
Each transaction has two sides: a debit and a credit
The total debits must equal the total credits

EXAMPLES:
You buy ₹ 1,000 worth of inventory with cash.
Debit Inventory (Asset) ₹ 1,000
Credit Cash (Asset) ₹ 1,000
This shows you've increased your inventory but
decreased your cash by the same amount.
JOURNAL ENTRIES
Journal entries are the first step in the accounting process.
They record transactions in chronological order.

FORMAT OF A JOURNAL ENTRY:

 GENERAL LEDGER
The general ledger is a master document containing all of a
company's accounts. It summarizes all journal entries.

FOR EACH ACCOUNT, THE GENERAL LEDGER SHOWS:

Beginning balance
Increases and decreases (from journal entries)
Ending balance
TRIAL BALANCE
A trial balance is a list of all accounts with their balances.
It's used to check if the total debits equal the total credits.

STEPS TO PREPARE A TRIAL BALANCE:

1. List all accounts
2. Enter debit or credit balances
3. Total both columns
FINANCIAL STATEMENTS OVERVIEW
Financial statements are reports that summarize a
company's financial position and performance. The main
financial statements are:

Income Statement
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity

These statements work

together to give a
complete picture of a
company's finances.
INCOME STATEMENT
The Income Statement (also called Profit and Loss
Statement) shows a company's revenues, expenses, and
profit over a specific period.

KEY COMPONENTS:
Revenue: Money earned from selling goods or services
Expenses: Costs incurred to earn revenue
Net Income (or Loss): Revenue minus Expenses
BALANCE SHEET
The Balance Sheet shows a company's assets, liabilities, and
owner's equity at a specific point in time. It's based on the
accounting equation:
Assets = Liabilities + Owner's Equity
CASH FLOW STATEMENT
The Cash Flow Statement shows how changes in balance
sheet accounts and income affect cash and cash
equivalents. It's divided into three sections:
Operating Activities: Cash from core business operations
Investing Activities: Cash from buying or selling long-
term assets
Financing Activities: Cash from debt and equity financing
DEPRECIATION METHODS
Depreciation is an accounting method that estimates
how much a fixed asset's value decreases over time.

Depreciation is the process of allocating the cost of a

long-term asset over its useful life.

There are several methods to calculate depreciation:

Straight-line method
Double declining balance method
Declining Balance Method
Units of production method
Sum of the Years' Digits Method
 Happy
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Mohit Kumar Sharma