Financial Accounting Review Sheet

Transactions are economic events that change the financial status of a business. Each one has an effect on at least two accounts. Purchasing and selling things are the most common transactions.

Analyzing Transactions

1) Determine which 2 accounts are affected.

2) Determine what is *classification of each account.

3) Determine which account is debited and by what amount.

4) Determine which account is credited and by what amount.

Account Types Real or Permanent – Carries Balance Forward Every Month.

Nominal or Temporary – Begins at Zero Every Month.

Debit and Credit Rules
CLASSIFICATION
/ DEBIT / CREDIT /
NORMAL BALANCE SIDE
/ Chart of Accts. Numbering

Assets

/  /  /
DEBIT
/ 100
Liabilities /  /  / CREDIT / 200
Owner’s Equity /  /  / CREDIT / 300
Revenue /  /  / CREDIT / 400
Expenses /  /  / DEBIT / 500

Adjusting Entries at end of period affect one balance sheet account and one income statement account.

Closing Entries close Income and Expenses to Equity

Identifying and Classifying Accounts

Accounting Equation A = L + O.E. + (R – Exp.)

ASSETS listed on Balance Sheet

“Nouns”

Prepaid______(Anything you paid in advance)

______Receivable

Current Assets – Liquidated or Convertible to Cash Quickly (Short Term < 12 mos.)

Fixed Assets (Usually used for many years and Depreciated over time) (Long Term > 12 mos.)

*Accumulated Depreciation (Contra-Asset ) against the cost of fixed assets as they are depreciated over time.

LIABILITIES listed on Balance Sheet

______Payable

Unearned ______ (Paid to you in advance)

Current Liabilities (Anythingto be paid in short term or paid on monthly basis)

Long Term Liabilities (Anything to be paid in more than a year like a Loan on Car or Mortgage on Building)

EQUITY (CORPORATION) listed on Balance Sheet and Statement of Changes in Stockholders Equity

Capital Stock or Common Stock (purchased by owners)

Dividends - Distribution to Owners

Retained Earnings - Accumulated annual Net Income over time

EQUITY (SOLE PROPRIETORSHIPS andPARTNERSHIPS) listed on Balance Sheet and Statement of Changes in Owner Equity

______,Capital (Stephen Rocco, Capital)

______, Withdrawals or Drawing (Stephen Rocco, Withdrawals)

REVENUE – listed on Income Statement

______Sales

______Fees

______Revenue

______Income

EXPENSES – listed on Income Statement

Cost of Goods or Merchandise Sold

Expenses are anything that is used, sold, broken, stolen, etc.

Regular costs generated by the operation of the business

Depreciation of Fixed Assets over time

*Amortization of Prepaid Expenses on monthly basis. Ex. - Insurance Policy paid at beginning of year, but used up month by month.

NET INCOME/ LOSS– listed on Income Statement and Statement of Changes.

* All Income and Expense account balances are closed by adding income to equity and subtracting expenses from equity as shown below in “Statement of Changes”..

Financial Statements

Balance Sheet shows financial standing or status on a specific date

$ Assets 10,000 $ Liabilities 3,000

$ Equity 7,000

------= ------

$10,000 $10,000

Income Statement shows financial performance over a period of time (month, quarter, year)

$ Revenues

- $ Expenses

======

$ Net Income / Loss

Statement of Changes in Stockholder Equity shows how Equity balance increases or decreases

(R – Exp.)

Statement of Changes in Owner Equity shows how Equity balance increases or decreases

Beginning Capital $

+ Added Investment by Owner $

+ Net Income (R – Exp) $

- Withdrawals by Owner $

------

Ending Capital $

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The Accounting Cycle

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