CHEAT SHEET
 Monetary unit
Account --- a record of increases and decreases in a
specific asset, liability, equity, revenue, or expense.
There are 2 kinds:
 Permanent Accounts are general accounts that
must be carried over to the next business
period. It includes all balance sheet accounts
such as assets, liabilities, and capital account.
 Nominal Accounts or Temporary Accounts are
general ledger account that must be closed at
the end of the reporting period and its balances
are transferred in a permanent account. It
includes all income statements accounts,
withdrawals, and income summary.
Accounting --- an information and measurement system
that identifies, records, and communicates an
organization’s business activities.
--- language of business because it
communicates data that help people make better
decisions.
--- as four areas of opportunities: financial,
managerial, taxation, and accounting related.
Accounting Convection --- guidelines used to help
companies determine how to record business
transactions not fully covered by accounting standards.
Accounting Cycle --- the steps in preparing financial
statements:
1. Analyze transactions
2. Journalize
3. Post
4. Prepare unadjusted trial balance
5. Adjust and post
6.  Prepare adjusted trial balance
7.  Prepare financial statements
8. Close accounts
9. Prepare post-closing trial balance
10. Reverse and post (optional step)
Accounting Postulates or Assumptions --- there are four:
 Going concern
 Time period
 Business entity
Accumulated Depreciation --- a separate contra
account. A contra account is an account linked with
another account, it has an opposite normal balance, and
it is reported as a subtraction from that other account’s
balance.
Accrual Basis Accounting --- records revenues when
services and products are delivered and records
expenses when incurred (matched with revenues).
--- under the GAAP, accrual
accounting should be used instead of cash basis
accounting as it better reflects comparability of financial
statements.
Accrued liabilities --- amounts owed that are not yet
paid. Examples are wages payable, taxes payable, and
interest payable.
Accounts payable --- are promises to pay later. Payables
can come from purchases of merchandise-for-resale,
supplies, equipment, and services. We record all
increases and decreases in payables in the Accounts
Payable account.
Accounts receivables --- are held by a seller and are
promises of payment from customers to sellers.
Accounts receivables are increased by credit sales or
sales on account (or on credit). They are decreased by
customer payments.
Adjusting Entries - made at the end of an accounting
period that reflects a transaction or event that is not yet
recorded. An adjusting entry affects one or more
income statement accounts and one or more balance
sheet accounts (but never the Cash account).

Assets --- resources a company owns or controls. These
resources are expected to yield future economic
benefits.
Balance Column Account Format --- similar to a T-
account in having columns for debits and credits. It is
different in including transaction date and explanation
columns. It also has a column with the balance of the
account after each entry is recorded.
Balance Sheet – has 2 kinds:
 Unclassified Balance Sheet
 Classified Balance Sheet
Boards of Directors --- oversee organizations. Directors
use accounting information to evaluate the
performance of executive management
Bookkeeping --- also known as recordkeeping ;
recording of transactions and events.
Cash Basis Accounting --- records revenues when cash is
received and records expenses when cash is paid. Cash
basis income is cash receipts minus cash payments.
Chart of Accounts --- a list of all ledger accounts and has
an identification number assigned to each account
Closing Process --- applies only to temporary or nominal
accounts. Transfer the end-of-period balances in
revenue, expense, and withdrawals accounts to the
permanent capital account. Closing entries are
necessary at the end of each period after financial
statements are prepared because:
 Revenue, expense, and withdrawals accounts
must begin each period with zero balances.
 Owner’s capital must reflect prior periods’
revenues, expenses, and withdrawals.
Cost --- measured on a cash or equal-to-cash basis.
Current Ratio --- one measure of a company’s ability to
pay its short-term obligations. A current ratio of over
1.0 means that current obligations can be covered with
current assets.
Customers --- use financial reports to assess the stability
of potential suppliers
Depreciation --- the allocation of the costs of these
assets over their expected useful lives. Depreciation
expense is recorded with an adjusting entry similar to
that for other prepaid expense.
Double-entry accounting demands the accounting
equation remain in balance, which means that for each
transaction:
 At least two accounts are involved, with at least
one debit and one credit.
 Total amount debited must equal total amount
credited.
Equity --- the owner’s claim on assets and is equal to
assets minus liabilities. Equity is also called net assets or
residual equity.
Ethics --- beliefs that separate right from wrong. They
are accepted standards of good and bad behavior.
External Independent Auditors --- examine financial
statements to verify that they are prepared according to
generally accepted accounting principles.
External users of accounting information do not directly
run the organization and have limited access to its
accounting information. These users get accounting
information from general-purpose financial statements.
Following is a partial list of external users and decisions
they make with accounting information.
Equipment is an asset. When equipment is used and
wears down, its cost is gradually reported as an expense
(called depreciation). Equipment often is grouped by its
purpose—for example, office equipment and store
equipment. Office equipment includes computers and
desks
Financial Accounting --- focuses on the needs of
external users by providing general-purpose financial
statements.
Fraud Triangle --- shows that three factors push a
person to commit fraud.
 Opportunity. A person must be able to commit
fraud with a low risk of getting caught.
 Pressure, or incentive. A person must feel
pressure or have incentive to commit fraud.
 Rationalization, or attitude. A person justifies
fraud or does not see its criminal nature.

Financial Statements
Financial Statements Analysis
1. liquidity and efficiency
2. solvency
3. profitability
4. market prospects

Financing activities --- provide the resources
organizations use to pay for assets such as land,
buildings, and equipment. The two sources of financing
are owner and nonowner. Owner financing refers to
resources contributed by the owner along with any
income the owner leaves in the organization. Nonowner
(or creditor) financing refers to resources loaned by
creditors (lenders).
Fiscal Year --- an accounting period consisting of any 12
consecutive months or 52 weeks.
Income Summary --- a temporary account only used for
the closing process that contains a credit for total
revenues (and gains) and a debit for total expenses (and
losses).
Internal transactions --- exchanges within an entity,
which may or may not affect the accounting equation.
Internal users of accounting information directly
manage the organization. Internal reports are designed
for the unique needs of managerial or executive
employees, such as the chief executive officer (CEO).
Investing activities are the acquiring and disposing of
assets that an organization uses to buy and sell its
products or services. Some organizations require land
and factories to operate. Others need only an office.
Invested amounts are referred to as assets. Creditor and
owner financing hold claims on assets. Creditors’ claims
are called liabilities, and the owner’s claim is called
equity. This yields the accounting equation: Assets =
Liabilities + Equity.
Journal --- a complete record of each transaction in one
place. It also shows debits and credits for each
transaction.
Ledger --- the collection of all accounts and their
balances. On the other hand, Subsidiary Ledgers are for
AR and AP with names of example, debtors or suppliers.
Lenders --- (creditors) loan money or other resources to
an organization. Banks, savings and loans, and mortgage
companies are lenders. Lenders use information to
assess if an organization will repay its loans.
Managerial Accounting --- focuses on the needs of
internal users.
Nonmanagerial and nonexecutive employees and labor
unions --- use external information to bargain for better
wages.
Note Payable --- a written promissory note to pay a
future amount. It is recorded as either a short-term
note payable or a long-term note payable, depending
on when it must be repaid.
Note Receivable, or Promissory Note --- a written
promise of another entity to pay a specific sum of
money on a specified future date to the holder of the
note; the holder has an asset recorded in a Note (or
Notes) Receivable account.
Operating activities --- involve using resources to
research, develop, purchase, produce, distribute, and
market products and services. Sales and revenues are
the inflow of assets from selling products and services.
Costs and expenses are the outflow of assets to support
operating activities.
Operating Cycle --- the time span from when cash is
used to acquire goods and services until cash is received
from the sale of goods and services.
Plant Assets --- are long-term tangible assets used to
produce and sell products and services. Plant assets
provide benefits for more than one period. Examples of
plant assets are buildings, machines, vehicles, and
fixtures. All plant assets (excluding land) eventually
wear out or become less useful.
Post-Closing Trial Balance --- a list of permanent
accounts and their balances after all closing entries. It
lists the balances for all accounts not closed. A post-
closing trial balance verifies that (1) total debits equal
total credits for permanent accounts and (2) all
temporary accounts have zero balances.
Prepaid accounts (or prepaid expenses) --- are assets
from prepayments of future expenses (expenses
expected to be incurred in future accounting periods).
When the expenses are later incurred, the amounts in
prepaid accounts are transferred to expense accounts.
Principles in Adjusting Process:
 Revenue recognition principle requires that
revenue be recorded when goods or services
are provided to customers and at an amount
expected to be received from customers.
Adjustments ensure revenue is recognized
(reported) in the time period when those
services and products are provided.
 Expense recognition (or matching) principle
requires that expenses be recorded in the same
accounting period as the revenues that are
recognized as a result of those expenses.
Profit Margin or Return on Sales --- a ratio that is useful
to measure a company’s operating results; the ratio of
its net income to net sales.
Public Accounting --- involves accounting services such
as auditing and taxation.
Regulators --- have legal authority over certain activities
of organizations. For example, the Internal Revenue
Service (IRS) requires accounting reports for computing
taxes.
Return on assets (ROA), also called return on
investment (ROI) --- Net income is from the annual
income statement, and average total assets is
computed by adding the beginning and ending amounts
for that same period and dividing by 2.
Revenue --- recognized (1) when goods or services are
provided to customers and (2) at the amount expected
to be received from the customer. Revenue (sales) is
the amount received from selling products and services.
Reversing entries --- are optional. They are recorded in
response to accrued assets and accrued liabilities that
were created by adjusting entries at the end of a
reporting period. Reversing entries simplify
recordkeeping.

Risk --- the uncertainty about the return we will earn.

Sarbanes-Oxley Act, also called SOX --- to help stop

Unearned revenue --- or deferred revenues, a liability to
financial abuses. SOX requires documentation and
settle in the future by delivering products or services.
verification of internal controls and emphasizes
When customers pay in advance for products or
effective internal controls. Management must issue a
services (before revenue is earned), the seller records
report stating that internal controls are effective.
this receipt as unearned revenue.

Shareholders --- (investors) are the owners of a

Voters and Government Officials --- use information to
corporation. They use accounting reports to decide
evaluate government performance.
whether to buy, hold, or sell stock.

Work Sheet --- a document that is used internally by

Source documents --- identify and describe transactions
companies to help with adjusting and closing accounts
and events entering the accounting system. They can be
and with preparing financial statements. It is an internal
in hard copy or electronic form. Examples are sales
accounting aid and is not a substitute for journals,
receipts, checks, purchase orders, bills from suppliers,
ledgers, or financial statements. A work sheet:
payroll records, and bank statements.
 Helps in preparing financial statements.
Reduces the risk of errors when working with
Suppliers --- use information to analyze a customer many accounts and adjustments.
before extending credit.  Links accounts and adjustments to financial
statements.
 Shows the effects of proposed or “what-if”
Supplies --- are assets until they are used. When they transactions.
are used up, their costs are reported as expenses.
Unused supplies are recorded in a Supplies asset
account.

T-account --- represents a ledger account and is used to

show the effects of transactions.

Time Period Assumption --- presumes that an

organization’s activities can be divided into specific time
periods such as a month, a three-month quarter, a
sixmonth interval, or a year.