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Accounting cheat sheet

Transaction analysis: start here

Expanded accounting equation:
Assets = Liabilities + Capital − Drawing + Revenue − Expenses
This expands the basic equation A = L + OE by showing the elements that change owner’s equity.

• Step 1: read the transaction and identify the accounts affected—never start with debit or credit.
• Step 2: classify every account as Assets, Liabilities, Capital, Drawing, Revenue, or Expenses.
• Step 3: decide whether each affected account increases or decreases.
• Step 4: prove both sides of Assets = Liabilities + Capital − Drawing + Revenue − Expenses remain equal.
• Assets: resources owned or controlled, such as Cash, Accounts Receivable, Supplies, Equipment, and Prepaid Insurance.
• Liabilities: obligations owed to outsiders, such as Accounts Payable, Wages Payable, and Notes Payable.
• Capital: the owner’s investment and cumulative claim in a non-corporation; an owner cash investment increases both Cash and Capital.
• Drawing: assets withdrawn by the owner for personal use; Drawing is subtracted because it decreases owner’s equity.
• Revenue: amounts earned from providing goods or services, such as Service Revenue or Sales Revenue; Revenue is added because it increases owner’s equity.
• Expenses: costs incurred to earn revenue, such as Rent Expense, Wages Expense, and Utilities Expense; Expenses are subtracted because they decrease owner’s equity.
• Buying equipment for cash exchanges one asset for another: Equipment increases and Cash decreases; total assets do not change.
• Borrowing cash increases an asset and a liability. Earning revenue increases an asset and Revenue. Paying an expense decreases an asset and increases Expenses.

Expanded equation to debits and credits

• Sole proprietorship: Assets = Liabilities + Capital − Drawing + Revenue − Expenses.
• Corporation: Assets = Liabilities + Common Stock + Beginning Retained Earnings + Revenue − Expenses − Dividends.
• First identify the affected accounts and whether each increases or decreases. Only then apply debit and credit rules.
• Assets increase with debits and decrease with credits. Liabilities, Common Stock, Capital, Retained Earnings, and Revenue increase with credits and decrease with debits.
• Drawing, Dividends, and Expenses reduce equity: they increase with debits and decrease with credits.
• Owner investment in a sole proprietorship credits Capital; shareholder investment in a corporation credits Common Stock and, when applicable, Paid-In Capital in Excess of Par. Neither is Revenue.
• Owner withdrawals debit Drawing; a corporation’s declared distribution debits Dividends or Retained Earnings and credits Dividends Payable. Drawing is not used by a corporation.
• Net income ultimately increases Capital for a sole proprietor and Retained Earnings for a corporation; net loss decreases those equity accounts.

Non-corporations

Sole proprietorships and partnerships use Drawing and Capital.

Corporations

Corporations use Dividends, Common Stock, and Retained Earnings.

All business types

Closing entries by business type

• Common sequence: close revenue accounts to Income Summary; close expense and contra-revenue accounts to Income Summary; close Income Summary’s net income or loss to the proper equity account; then close the withdrawal or distribution account directly to equity.
• Sole proprietorship: close Income Summary and the owner’s Drawing account to the owner’s Capital account.
• Partnership: allocate Income Summary’s net income or loss to each partner’s Capital account under the partnership agreement, then close each partner’s Drawing account to that same partner’s Capital account.
• Corporation: close Income Summary to Retained Earnings and close Dividends to Retained Earnings. Common Stock is permanent and is never closed.
• Service company: close service revenue and all operating expenses. It has no merchandise Cost of Goods Sold or merchandise inventory accounts to close.
• Merchandiser—perpetual: close Sales Revenue, Sales Returns and Allowances, Sales Discounts, Cost of Goods Sold, and operating expenses. Merchandise Inventory is a permanent asset and remains open.
• Merchandiser—periodic: determine Cost of Goods Sold at period-end and close temporary Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-In along with sales, contra-revenue, Cost of Goods Sold, and operating-expense accounts. Merchandise Inventory is updated to its ending balance rather than closed to zero.
• Manufacturer: close Sales Revenue, Cost of Goods Sold, and selling and administrative expenses. Raw Materials, Work in Process, and Finished Goods are permanent inventory assets and remain open.
• Before the manufacturer’s expense accounts are closed, dispose of underapplied or overapplied Manufacturing Overhead—commonly to Cost of Goods Sold when the amount is immaterial, or by proration when material.
• Closing entries reset temporary accounts for the next period. Cash, receivables, inventory, liabilities, and equity accounts are permanent and carry forward.

Adjusting entries

• Accrued revenue: debit Receivable, credit Revenue.
• Accrued expense: debit Expense, credit Payable.
• Used prepaid expense: debit Expense, credit Prepaid Asset.
• Earned advance: debit Unearned Revenue, credit Revenue.
• Depreciation: debit Depreciation Expense, credit Accumulated Depreciation.

Depreciation and long-term assets

• Depreciable base: asset cost − estimated residual value. Depreciation allocates cost over useful life; it does not measure a decline in market value.
• Straight-line: (cost − residual value) ÷ useful life. The same amount is recorded each full year.
• Units-of-production: (cost − residual value) ÷ estimated total units gives depreciation per unit; multiply by actual units produced or used. Time in service does not control this method.
• Double-declining-balance: beginning book value × (2 ÷ useful life). Do not subtract residual value before applying the rate, but never depreciate the asset below residual value.
• Sum-of-the-years’-digits: depreciable base × remaining-life fraction. For an n-year asset, the denominator is n(n + 1) ÷ 2.
• Partial year: when a problem uses monthly proration, multiply the full-year amount by months in service ÷ 12. Units-of-production instead uses the actual units for the partial period. Follow any stated half-year or other convention.
• Sale: first record depreciation through the disposal date. Book value = cost − accumulated depreciation. Proceeds above book value create a gain; proceeds below book value create a loss.
• Exchange with commercial substance: measure the new asset at fair value and generally recognize the old asset’s gain or loss. Gain or loss = fair value of the old asset − its book value.
• Exchange without commercial substance: losses are generally recognized; gains are generally deferred, except that cash received can cause partial gain recognition. Use the rule specified in the problem.
• Disposal entry: remove both the asset’s original cost and its accumulated depreciation, record any cash paid or received, record the new asset when applicable, and use a gain or loss to balance.

Bad debts

• Estimate uncollectibles: debit Bad Debt Expense; credit Allowance for Doubtful Accounts.
• Write off an account: debit Allowance for Doubtful Accounts; credit Accounts Receivable.
• Recover a write-off: first reinstate the receivable; then debit Cash and credit Accounts Receivable for the collection.
• The allowance method reports receivables at net realizable value and matches bad debt expense with related sales.
• The direct write-off method is not GAAP because it delays bad debt expense and can overstate Accounts Receivable.

Notes receivable

• Interest: Principal × Annual Rate × Time. Express months as months ÷ 12 and days using the convention specified in the problem.
• Maturity value: principal + total interest. The note’s term begins the day after its issue date.
• Accept a note: debit Notes Receivable and credit Accounts Receivable, Cash, or Sales Revenue, depending on what the note replaces or finances.
• Collection with no prior adjustment: debit Cash for maturity value; credit Notes Receivable for principal; credit Interest Revenue for all interest earned.
• Year-end accrued-interest adjustment: debit Interest Receivable and credit Interest Revenue for interest earned through year-end.
• Collection after an adjustment: credit Interest Receivable for interest recognized earlier and credit Interest Revenue only for interest earned in the new period.
• Dishonored note: transfer the maturity value to Accounts Receivable by debiting Accounts Receivable and crediting Notes Receivable plus Interest Revenue or Interest Receivable, as applicable.

Credit card transactions

• A credit card sale is treated as a cash sale when the card processor accepts the transaction and deposits funds promptly.
• Merchant entry: debit Cash for the net deposit, debit Credit Card Expense for the processor fee, and credit Sales Revenue for the gross sale.
• If settlement is delayed, the merchant may debit a receivable from the card processor first, then debit Cash and credit that receivable when payment arrives.
• A customer records a purchase charged to a credit card by debiting the asset or expense acquired and crediting a credit card payable.

Merchandise entries: perpetual vs. periodic

Assume the gross method. The revenue-side entries are the same; the inventory-cost entries differ.

Net purchases: Purchases − Purchase Returns and Allowances − Purchase Discounts. Add Freight-In to find cost of goods purchased.

Inventory costing

• FIFO: oldest costs go to cost of goods sold; newest costs remain in ending inventory.
• LIFO: newest costs go to cost of goods sold; oldest costs remain in ending inventory.
• Periodic weighted average: total cost of goods available ÷ total units available.
• Perpetual moving average: recalculate average unit cost after each purchase.
• FIFO gives the same total under periodic and perpetual systems; LIFO and average cost can differ when purchases and sales alternate.

Worked example: 10 units at $5 plus 10 at $7; sell 12. Periodic FIFO gives COGS $64 and ending inventory $56; periodic LIFO gives $80 and $40; periodic weighted average gives $72 and $48.

Manufacturing statement

• Direct materials used: beginning Raw Materials + purchases − ending Raw Materials.
• Total manufacturing costs: direct materials used + direct labor + manufacturing overhead.
• Cost of goods manufactured: beginning Work in Process + total manufacturing costs − ending Work in Process.
• Cost of goods sold: beginning Finished Goods + cost of goods manufactured − ending Finished Goods.
• Completed production flows from Work in Process to Finished Goods; when sold, its cost flows to Cost of Goods Sold on the income statement.

Job order costing

• A job cost sheet is the subsidiary record for one job. It accumulates direct materials, direct labor, and applied manufacturing overhead.
• Direct materials come from materials requisitions; direct labor comes from employee time tickets. Both are traced to Work in Process by job.
• Predetermined overhead rate (POHR): estimated total manufacturing overhead ÷ estimated total allocation-base activity.
• Applied overhead: POHR × actual allocation-base activity used by the job. Debit Work in Process and credit Manufacturing Overhead.
• Actual overhead is debited to Manufacturing Overhead. If actual overhead exceeds applied overhead, overhead is underapplied; if applied exceeds actual, it is overapplied.

Activity-based costing (ABC)

• ABC groups overhead into separate activity cost pools, such as setups, purchase orders, inspections, or machine processing.
• Each pool uses a cost driver that reflects what causes that activity’s cost, such as setup count, purchase-order count, inspection-hours, or machine-hours.
• Activity rate: estimated cost in an activity pool ÷ estimated total quantity of its cost driver.
• Overhead assigned to a product: activity rate × the product’s actual use of that activity. Sum assignments from all activity pools.
• Traditional costing often uses one plantwide rate based on volume, such as direct labor-hours or machine-hours. ABC uses multiple drivers and can reveal cross-subsidization between simple high-volume products and complex low-volume products.
• ABC can improve product-cost and pricing decisions, but it costs more to design, measure, and maintain than a single-rate system.
• Cost-to-charge ratio (CCR): Total Costs ÷ Total Charges. Estimated cost for a service = its Charges × CCR. A department-specific CCR is often more representative than one organization-wide ratio when departments have different markups.
• Relative value units (RVUs): weights that compare the resources required by services. Allocate a cost pool using each service’s total RVUs ÷ total RVUs for all services; total RVUs usually equal RVUs per service × service volume.
• How they differ: ABC follows activities and their cost drivers; CCR converts charges to estimated costs using a cost/charge relationship; RVU allocation distributes a pool using relative resource weights.

Capital budgeting

• Payback period: time required for undiscounted cash inflows to recover the initial investment. For equal annual inflows, initial investment ÷ annual cash inflow. Shorter is generally preferred, but payback ignores the time value of money and cash flows after recovery.
• Net present value (NPV): present value of cash inflows − present value of cash outflows, discounted at the required return. Accept an independent project when NPV > 0; reject when NPV < 0. For mutually exclusive projects, prefer the feasible project with the highest positive NPV.
• Internal rate of return (IRR): the discount rate that makes NPV equal zero. Accept an independent project when IRR exceeds the hurdle rate; reject when it is below. Nonconventional cash flows can produce multiple IRRs.
• Modified internal rate of return (MIRR): compounds positive cash flows to the end at a chosen reinvestment rate, discounts negative cash flows to the start at a finance rate, then finds the rate connecting those amounts. Accept when MIRR exceeds the hurdle rate.
• Comparison: NPV directly measures value added and is generally preferred when methods conflict. IRR and MIRR express returns as percentages; MIRR uses explicit finance and reinvestment assumptions and avoids the multiple-IRR problem.

Time value of money

• Future value of one: FV = PV × (1 + i)ⁿ. Use the future value of $1 table or factor for a single current sum compounded forward.
• Present value of one: PV = FV ÷ (1 + i)ⁿ. Use the present value of $1 table or factor for a single future sum discounted back.
• Ordinary annuity: equal payments occur at the end of each period. Use the PV of an ordinary annuity factor to value the payment stream now, or the FV of an ordinary annuity factor to accumulate it at the end.
• Annuity due: equal payments occur at the beginning of each period. Its PV or FV factor equals the comparable ordinary-annuity factor × (1 + i), because every payment earns or is discounted for one fewer period.
• Periodic inputs: periodic rate = annual nominal rate ÷ compounding periods per year; number of periods = years × compounding periods per year.
• All else equal, a higher rate or more periods raises future value and lowers the present value of a fixed future amount. More frequent compounding at a positive nominal rate also raises effective annual growth.

Process costing

• Process costing averages costs across many similar units by department or process rather than tracing costs to individual jobs.
• Equivalent units: physical units × percentage complete for each cost category. Materials and conversion can have different completion percentages.
• Cost per equivalent unit: costs to account for ÷ equivalent units for that cost category.
• A process cost report reconciles physical units, computes equivalent units, calculates cost per equivalent unit, and assigns cost to units transferred out and ending Work in Process.
• Transferred-out cost moves from one department’s Work in Process to the next department, or to Finished Goods after the final process.

Stores ledger for materials

• A stores ledger is a perpetual subsidiary record showing each material’s quantities and costs received, issued, and on hand.
• Balance: beginning materials + receipts − issues = ending materials. Update both units and cost after every receipt or issue.
• A receiving report supports a receipt. A materials requisition authorizes an issue to production.
• Direct-material issues debit Work in Process; indirect-material issues debit Manufacturing Overhead. Both credit Raw Materials.

Breakeven analysis and leverage

• Variable costs change in total with activity; fixed costs stay constant in total within the relevant range.
• Contribution margin per unit: selling price per unit − variable cost per unit. CM ratio: contribution margin ÷ sales.
• Breakeven units: fixed costs ÷ CM per unit. Breakeven sales dollars: fixed costs ÷ CM ratio.
• Target-profit units: (fixed costs + target operating income) ÷ CM per unit.
• Degree of operating leverage: contribution margin ÷ operating income. Higher fixed operating costs make operating income more sensitive to sales changes.
• Financial leverage comes from fixed financing costs such as interest. Debt can magnify gains to owners, but it also magnifies losses and financial risk.

Master budget and flexible budgets

• The sales budget starts the master budget: expected unit sales × selling price. Its unit forecast drives production.
• Required production: budgeted sales + desired ending finished goods − beginning finished goods.
• Direct-material purchases: materials needed for production + desired ending materials − beginning materials. Multiply units to purchase by cost per unit.
• The direct labor budget uses required production × labor-hours per unit × wage rate. The manufacturing overhead budget separates variable overhead from fixed overhead.
• The cash budget combines beginning cash, expected collections, cash payments, financing, and the desired ending cash balance.
• The budgeted income statement uses budgeted sales, cost of goods sold, and operating expenses to project operating results.
• A flexible budget restates budgeted revenue and costs for the actual activity level. Compare actual results with the flexible budget to isolate spending and revenue variances; compare the flexible and static budgets to isolate activity-volume effects.
• For costs, actual above flexible budget is unfavorable; actual below flexible budget is favorable. Interpret revenue variances in the opposite direction.

Payroll

• Gross pay: earnings before deductions. Net pay: gross pay minus employee deductions.
• Employee deductions can include federal income tax, FICA Social Security and Medicare, and applicable state or local taxes.
• Record payroll: debit Wages or Salaries Expense for gross pay; credit withholding liabilities and Cash or Wages Payable for net pay.
• Employer payroll taxes: matching FICA plus FUTA and SUTA. Debit Payroll Tax Expense; credit the related tax payables.
• Pay employees: debit Wages Payable and credit Cash when previously accrued payroll is paid.

Bank reconciliation

• Bank side: add deposits in transit; subtract outstanding checks; correct bank errors.
• Book side: add bank collections and interest; subtract service charges, NSF checks, and company errors.
• Only book-side reconciling items require company journal entries. Timing differences and bank errors do not.
• After all adjustments, adjusted bank balance must equal adjusted book Cash balance.

10-column worksheet

Trial Balance → Adjustments → Adjusted Trial Balance → Income Statement and Balance Sheet columns. Each pair has a debit and a credit column.

Net income: income-statement credits exceed debits. Enter the difference on the Income Statement debit side and Balance Sheet credit side.

Financial statement analysis

• Horizontal analysis: compare the same line item across periods. Dollar change = current-period amount − prior-period amount.
• Percentage change: dollar change ÷ prior-period amount × 100. State whether the result is an increase or decrease.
• Trend analysis: set the base-year amount at 100%; trend percentage = comparison-year amount ÷ base-year amount × 100.
• A percentage change cannot be meaningfully computed when the prior-period base is zero.
• Vertical analysis: express each line item as a percentage of a base amount within the same statement and period.
• On a common-size income statement, the usual base is net sales. On a common-size balance sheet, the usual base is total assets.
• Common-size percentages help compare companies or periods of different sizes, but they still require context and careful interpretation.
• Liquidity: current ratio = Current Assets ÷ Current Liabilities. Quick ratio = (Cash + Short-Term Investments + Net Accounts Receivable) ÷ Current Liabilities. Higher generally means stronger short-term payment capacity, but an extremely high ratio may signal idle assets.
• Solvency: debt-to-equity = Total Liabilities ÷ Total Equity; debt-to-assets = Total Liabilities ÷ Total Assets. Lower generally means less creditor financing and financial risk.
• Times interest earned: EBIT ÷ Interest Expense. A higher ratio generally means a stronger ability to cover interest from operating earnings.
• Profitability: gross profit margin = Gross Profit ÷ Net Sales; net profit margin = Net Income ÷ Net Sales; ROA = Net Income ÷ Average Total Assets; ROE = Net Income ÷ Average Total Equity. Higher is generally better, but compare with peers and prior periods.
• Efficiency: inventory turnover = Cost of Goods Sold ÷ Average Inventory; receivables turnover = Net Credit Sales ÷ Average Net Accounts Receivable; asset turnover = Net Sales ÷ Average Total Assets. Higher generally signals more efficient use, though unusually high inventory turnover can also indicate stockouts.
• Use average balance-sheet amounts when a ratio combines an income-statement flow with a balance-sheet balance: average = (beginning + ending) ÷ 2.

Stockholders’ equity transactions

• Common stock: usually carries voting rights and a residual claim on assets and dividends. Common shareholders receive what remains after creditors and preferred claims; dividends are not guaranteed.
• Preferred stock: normally has priority over common stock for stated dividends and liquidation distributions, but often has limited or no voting rights. Features can include cumulative, participating, convertible, or callable terms.
• Cash dividend declaration: debit Retained Earnings (or Cash Dividends) and credit Dividends Payable. The declaration creates a liability. The date of record requires no journal entry. On payment, debit Dividends Payable and credit Cash.
• Small stock dividend: generally less than the 20%–25% guideline of previously outstanding shares. Capitalize fair market value: debit Retained Earnings for market value; credit Common Stock Dividends Distributable for par; credit Paid-In Capital in Excess of Par for the remainder.
• Large stock dividend: generally more than the 20%–25% guideline. Capitalize par or stated value: debit Retained Earnings and credit Common Stock Dividends Distributable for par value.
• When stock-dividend shares are distributed, debit Common Stock Dividends Distributable and credit Common Stock. Total stockholders’ equity does not change; amounts move within equity.
• Stock split: increases shares outstanding and reduces par value per share proportionately, leaving total par value and total stockholders’ equity unchanged. No journal entry is recorded; a memorandum entry updates the share data.

Treasury stock transactions

• Treasury stock is a corporation’s own stock that it issued and later reacquired. It is a contra-equity account, not an asset.
• Purchase treasury stock at cost: debit Treasury Stock; credit Cash. Total stockholders’ equity decreases.
• Reissue above cost: debit Cash; credit Treasury Stock for its cost; credit Paid-In Capital from Treasury Stock for the excess.
• Reissue below cost: debit Cash and Paid-In Capital from Treasury Stock; credit Treasury Stock for its cost. If that paid-in capital balance is insufficient, debit Retained Earnings for the remainder.
• Gains and losses are not reported on the income statement when a corporation transacts in its own stock.

Statement of retained earnings

• Ending retained earnings: beginning retained earnings + net income − dividends. Substitute net loss by subtracting it.
• Prior-period adjustments, when applicable, adjust beginning retained earnings net of tax before current-period net income and dividends.
• Ending retained earnings flows to stockholders’ equity on the balance sheet. It is not the same as Cash.

Statement of cash flows

• Operating activities: cash effects of core revenue-producing operations, such as collections from customers and payments to suppliers and employees.
• Investing activities: purchases and sales of long-term assets and investments, and loans made to others and principal collected.
• Financing activities: transactions with owners and creditors, such as issuing stock, buying treasury stock, borrowing principal, repaying principal, and paying dividends.
• Cash reconciliation: beginning Cash + net change in Cash = ending Cash. Ending Cash agrees with the balance sheet.
• Under the indirect method, operating cash flow begins with net income. Add back noncash expenses such as depreciation and amortization.
• Subtract gains and add losses on sales of long-term assets in the operating section; the related cash proceeds belong in investing activities.
• For operating current assets, increases are subtracted and decreases are added. For operating current liabilities, increases are added and decreases are subtracted.

Financial statements

• Income statement: Revenues − Expenses = Net income.
• Non-corporation equity: Beginning capital + investments + net income − drawing = Ending capital.
• Corporation equity: Beginning retained earnings + net income − dividends = Ending retained earnings.
• Balance sheet: Assets = Liabilities + Equity.
• Cash flows: operating, investing, and financing activities explain the change in Cash.

Flow: For non-corporations, net income and drawing flow to ending Capital. For corporations, net income and dividends flow to ending Retained Earnings in stockholders’ equity. Ending Cash agrees with the balance sheet.