Financial Accounting For Dummies Cheat Sheet - dummies (2022)

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By: Maire Loughran and

Updated: 03-18-2021

From The Book: Financial Accounting For Dummies

(Video) ACCOUNTING BASICS: a Guide to (Almost) Everything

Financial Accounting For Dummies

Financial Accounting For Dummies Cheat Sheet - dummies (1)

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Financial accounting is the process of preparing financial statements for a business. The three key financial statements are the income statement, balance sheet, and statement of cash flows. They serve two broad purposes: to report on the current financial position of the company, and to show how well the company performs over a period of time.

Investors, creditors, and other interested parties rely on such information to find out whether a business is making or losing money, and they depend on financial accountants to help ensure that these statements are materially correct and understandable.

Financial Accounting For Dummies Cheat Sheet - dummies (2) © NicoElNino / Shutterstock.com

Accounting Details in Different Kinds of Financial Statements

The three key financial statements are the income statement, balance sheet, and statement of cash flows. All three record the same daily accounting transactions occurring in a business, but each presents the facts slightly differently.

(Video) ACCOUNTING BASICS: Debits and Credits Explained

Standing on their own, the financial statements contain valuable information about a company. However, a user has to see all three financial statements interacting together to form an opinion approaching reliability about the company. Here’s a quick explanation of each financial statement:

  • Income statement: The income statement shows a company’s results of operations. Using this statement, you can see if a business has income or loss during the financial period. You’ll find all revenue, expenses, gains, and losses for a company on this financial statement.
  • Balance sheet: The balance sheet shows the health of a business from the day it started operations to the specific date of the balance sheet report. Therefore, it reflects the company’s financial position. It lists the company’s assets, liabilities, and equity. Assets are resources a company owns such as cash or inventory. Liabilities are claims against the company’s assets, such as unpaid bills. And equity is the difference between the two, showing the owners’ total investment in the business.
  • Statement of cash flows: This financial statement reveals how a company is bringing in and spending its cash. Investors and potential creditors use this information to gauge whether a business has sufficient cash flow to pay dividends to its investors or repay loans made by its creditors.

Financial Accounting Key Terms and Definitions

In a financial accounting class, and on the job as an accountant, you need to know some jargon. Following is a glossary of words and phrases crucial to the accounting profession.

  • Users of financial accounting information: The people or businesses that need to see the accounting transactions organized into financial statements to make educated decisions of their own—usually these decisions revolve around whether the user wants to invest in or loan a company money.
  • Characteristics of financial information: Financial accounting information has to be:
    • Relevant: The information directly relates to the facts you’re trying to evaluate or understand.
    • Reliable: You can depend on the information to steer you in the right direction.
    • Comparable: The quality of the information is such that users can identity differences and similarities between companies they are evaluating.
    • Consistent: The company uses the same accounting treatment for the same type of accounting transactions.
  • Generally accepted accounting principles (GAAP): The rules financial accountants must follow when handling accounting transactions and preparing financial statements. Financial accountants can’t just throw numbers on the income statement, balance sheet, or statement of cash flows; a level playing field must exist between businesses so that the individuals reading the financial statement can compare one company to another.

Just about everything you learn and do in a financial accounting class harkens back to the way accounting principles tell accountants how to do their job. For example, these principles determine how to expense assets, record revenue, and value inventory. The Financial Accounting Standards Board (FASB) is the private sector body that established GAAP for all non-governmental entities.

  • American Institute of Certified Public Accountants (AICPA): The national professional organization for all certified public accountants.
  • Certified Public Accountant (CPA): The professional license required to work as a CPA. You must first complete a certain number of accounting and business-related courses in college. You then must take and pass the Uniform Certified Public Accountant exam, which is written and scored by the AICPA.
  • Chart of accounts: A list of all accounts set up to handle the company accounting transactions. The accounts are numbered in order, usually starting with 1,000 (assets) continuing through to 9,000 (miscellaneous gains and losses).
  • General ledger: The record of all financial transactions taking place within a business during a particular accounting cycle, ordered by chart of account number.
  • Depreciation: The method used to systematically move the cost of an asset from the balance sheet to the income statement over the course of the asset’s useful life. Financial accounting uses four methods of depreciation based on time: straight-line, declining balance, sum-of-the-years’ digits; and units-of-production. The last is based on actual physical usage of the fixed asset.
  • Methods of Accounting: The rules a company follows to report transactions:
    • Cash method: Revenue is recorded when it is received, and expenses are recorded when they are paid. The effects of accounts receivable and accounts payable are eliminated.
    • Accrual method: The opposite of cash, revenue is recorded when it is earned and realizable. Expenses are recorded when they are incurred. Accounts receivable and accounts payable are definitely a part of this equation!
  • Stockholders’ equity: The claim that shareholders of the corporation have to the company’s net assets. Stockholders’ equity has three common components:
    • Paid-in capital: Money the shareholders in the corporation invest in the business.
    • Treasury stock: A company’s own stock, which it buys back from other investors.
    • Retained earnings: The company’s total net income or loss from the first day it’s in business to the date on its balance sheet.
  • Contingency: A liability that exists because of a circumstance (such as a lawsuit) that may cause a business loss in the future depending on other events that have yet to happen (such as the outcome of a trial) and, indeed, may never happen.
  • Impairment Loss: An impairment loss takes place when a company makes the judgment call that the carrying value of an asset on the company balance sheet is less than fair value, which is what an unpressured person would pay for the asset in an open marketplace. If the impairment loss is not recoverable, under U.S. GAAP, the company must adjust the books to reflect this lessening in value.

Working toward a Financial Accounting Career

As a financial accountant, you may choose to work in public accounting (doing jobs for multiple business clients) or corporate accounting (performing accounting work only for your employer). You can also choose to specialize in governmental accounting, not-for-profit accounting, forensic accounting (which relates to legal proceedings or testimony), or other specific fields.

No matter what your professional goals are, certain coursework and certifications can help ensure your success:

  • Undergraduate courses: For a bachelor’s degree in accounting, you probably need about 120 credit hours total. In addition to general education requirements, you take core business classes, such as Financial Accounting, Managerial Accounting, Business Law, Principles of Management, Economics, Finance, and Marketing. You also take more specific accounting courses, such as Intermediate Accounting, Federal Income Tax, Accounting Information Systems, and Auditing.
  • Graduate courses: To earn a Masters in Business Administration (MBA) degree, you probably need to take 30 credit hours of graduate-level courses. If you plan to sit for the Certified Public Accountant (CPA) exam, be sure to map your MBA courses to meet the requirements to sit for the exam. Check out Steps to Become a CPA at the American Institute of CPAs for guidance.
  • CPA exam: The CPA is the professional license required to work as a CPA You must first complete a certain number of accounting and business-related courses in college. You then must take and pass the Uniform Certified Public Accountant exam, which is written and scored by the American Institute of Certified Public Accountants (AICPA).
  • Other licenses: In addition to pursuing your CPA license, you may decide to add more initials after your name by pursuing a designation, such as Forensic CPA, Certified Fraud Examiner (CFE), or Certified Management Accountant (CMA).

About This Article

This article is from the book:

  • Financial Accounting For Dummies ,
(Video) "Accounting For Dummies" Do You Know The Accounting Basics?

About the book author:

Maire Loughran is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.

This article can be found in the category:

  • General Accounting ,
(Video) Accounting for Beginners #1 / Debits and Credits / Assets = Liabilities + Equity
  • Key Financial Accounting Terms and Definitions
  • Accounting Details in Different Kinds of Financial Statements
  • Working toward a Financial Accounting Career
  • View All Articles From Book
(Video) The BALANCE SHEET for BEGINNERS (Full Example)

FAQs

What are the 11 basic accounting formulas? ›

The formulas are listed below for your convenience.
  • Current Ratio = Current Assets/ Current Liabilities.
  • Net Income = Income - Expenses.
  • Cost of Goods Sold = Opening inventory value + Purchases of inventory – Closing inventory value.
  • Gross Profit = Sales - Cost of Goods Sold.
  • Gross profit Margin = Gross Profit/ Sales.

How can I teach myself accounting? ›

To learn accounting on your own, start by reading books on the subject and familiarizing yourself with how to create finance spreadsheets. Practice basic accounting skills like recording debits and credits and setting up and maintaining ledgers.

What are the 7 steps of accounting? ›

The seven steps in the accounting cycle are as follows:
  • Identifying and Analysing Business Transactions.
  • Posting Transactions in Journals.
  • Posting from Journal to Ledger.
  • Recording adjusting entries.
  • Preparing the adjusted trial balance.
  • Preparing financial statements.
  • Post-Closing Trial Balance.

How do you memorize the accounting equation? ›

Trick to remember debits and credits - YouTube

How can I learn accounting for free? ›

Let's look at a few sites where you can learn accounting for free online.
  1. LearnAccountingForFree.com. Learn Accounting For Free is a website with an online course where you can start to learn accounting for, well, free! ...
  2. Accounting Coach. ...
  3. Corporate Finance Institute (CFI) Accounting Course.
30 Nov 2020

How do I study financial accounting? ›

8 Habits of Top Accounting Students
  1. Make sure you can solve every type of problem illustrated in your textbook. ...
  2. Test yourself after each lesson. ...
  3. Work hard from Day One. ...
  4. Rely on discipline, not just motivation. ...
  5. Participate in class or online. ...
  6. Try to understand patterns. ...
  7. Try understanding 'why' ...
  8. Compete with yourself.
9 Jul 2018

Can you teach yourself Financial Accounting? ›

You can teach yourself accounting basics, but an accounting degree is usually necessary for professional certification. If taking the CPA exam is a goal, most states will require an accounting degree. But if the goal is to learn the basics, self-teaching is an excellent option.

What are the 3 basic concepts of accounting? ›

What are the Basic Accounting Concepts?
  • Accruals Concept. Revenue is recognized when earned, and expenses are recognized when assets are consumed. ...
  • Conservatism Concept. ...
  • Consistency Concept.
11 Aug 2022

What are the basic things an accountant should know? ›

Basic Accounting Skills Every Professional Accountant Must Have!
  • Interpersonal skills: There is a misconception that an accountant's work involves purely number crunching. ...
  • Taxation. Taxation is a very volatile and dynamic subject. ...
  • Analysis. ...
  • Accounting basics. ...
  • National certification. ...
  • Accounting Software.
12 Dec 2018

What are the basic knowledge of accounts? ›

Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows. You will become familiar with accounting debits and credits as we show you how to record transactions.

What is the 10 Step accounting cycle? ›

There are ten steps in an accounting cycle, which include analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial ...

What is Full Cycle bookkeeping? ›

Full cycle accounting refers to the complete set of activities undertaken by an accounting department to produce financial statements for a reporting period.

What are the basic steps of bookkeeping? ›

The process of bookkeeping involves four basic steps: 1) analyzing financial transactions and assigning them to specific accounts; 2) writing original journal entries that credit and debit the appropriate accounts; 3) posting entries to ledger accounts; and 4) adjusting entries at the end of each accounting period.

What is debit in accounting? ›

Debit means an entry recorded for a payment made or owed. A debit entry is usually made on the left side of a ledger account. So, when a transaction occurs in a double entry system, one account is debited while another account is credited.

What is the difference between debit and credit? ›

When you use a debit card, the funds for the amount of your purchase are taken from your checking account in almost real time. When you use a credit card, the amount will be charged to your line of credit, meaning you will pay the bill at a later date, which also gives you more time to pay.

Is cash a credit or debit? ›

Debit and credit accounts
AccountWhen to Debit
Cash and bank accountsWhen depositing funds or a customer makes a payment
Accounts receivableWhen a sale is made on credit
Various expense accounts such as rent, utilities, payroll, and office suppliesWhen a purchase is made or a bill paid
Accounts payableWhen a bill is paid
1 more row

What are the 3 formulas of accounting equation? ›

What Are the 3 Elements of the Accounting Equation? The three elements of the accounting equation are assets, liabilities, and shareholders' equity. The formula is straightforward: A company's total assets are equal to its liabilities plus its shareholders' equity.

Is a debit Red or Green? ›

Port is on the left and always red. So, starboard is on the right and always green. One way to remember is the question, “Is there any red port wine left in the bottle?” You can now remember port is red and on the left side. So, in the examples below, debits will be in red and credit are in green.

Which is the best site to learn accounting? ›

Compare the Best Online Accounting Courses
ClassWhat It's Best For
Develop Your Finance and Accounting Skills Path by LinkedIn LearningBest Overall
Introduction to Financial Accounting by UdemyBest Budget Option
Introduction to Finance and Accounting Specialization from CourseraBest for Basics
3 more rows
2 Sept 2022

How can I study financial accounting in one day? ›

Learn Accounting in 1 HOUR First Lesson: Debits and Credits - YouTube

Can you teach yourself bookkeeping? ›

Yes, you can teach yourself bookkeeping.

There are many quality resources online that a person can use to learn all the necessary skills and knowledge to become a bookkeeper. It is important to take courses that teach both basic bookkeeping and higher-level accounting.

How do you not fail accounting? ›

Periodically review your class notes and revisit the homework problems that you did not answer correctly. Look over the notes on why your first answer was not correct, and then try to answer the problems that you got wrong again.

How long does it take to learn financial accounting? ›

It usually takes four years to earn an accounting degree at a traditional, in-person college or university. However, there are alternative routes that would allow you to complete your degree even faster.

How easy is financial accounting? ›

Financial accounting can be hard and easy depending on the person's interest. Financial accounting can be a rewarding field if you have basic math skills, analytical, logical, and organized mind. It's true that you need to apply different mathematical concepts while studying financial accounting.

What is the best way to learn finance for beginners? ›

Learn and Master the Basics of Finance
  1. Understand basic to moderately complex finance topics.
  2. Understand the "Financial Times" or any other similar business newspaper or magazines.
  3. Talk confidently about the latest financial issues at dinner parties.
  4. Learn the techniques to managing finances and building wealth.

How can I improve my financial knowledge? ›

Enroll for a short-term course

There are many short-term courses that you can pick up and one has to first decide which aspect he wants to obtain deeper knowledge. For example, a course in Personal Finance often involves programmes like Chartered Wealth Manager and Certified Financial Planner.

What is the difference between bookkeeping and accounting? ›

While bookkeeping is all about recording of financial transactions, accounting deals with the interpretation, analysis, classification, reporting and summarization of the financial data of a business.

What are the 4 principles of accounting? ›

There are four basic principles of financial accounting measurement: (1) objectivity, (2) matching, (3) revenue recognition, and (4) consistency.

What is the basic equation in accounting? ›

Also known as the balance sheet equation, the accounting equation formula is Assets = Liabilities + Equity. This equation should be supported by the information on a company's balance sheet.

What is accounting in simple words? ›

: the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. also : the principles and procedures of this system. studied accounting as a freshman.

What are the 5 types of accounts? ›

The 5 Account Types
  • Assets.
  • Liabilities.
  • Expenses.
  • Income (Revenue)
  • Equity.
20 Jul 2022

What are the three types of ledger? ›

The three types of ledgers are the general, debtors, and creditors. The general ledger accumulates information from journals.

Which is the most important step in the accounting process? ›

There are eight steps in accounting cycle they are: Journal entries, Posting, trial balance, worksheet, adjusting journal entries, financial statements, and closing of the books. Preparing financial statement is the most important phase of accounting cycle.

What are the basic financial statements? ›

There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time.

How do you write a journal entry? ›

First read and understand the transaction clearly. Find out which account is to be debited and credited, and after this you can enter journal entry. After entering the journal entry, write down the summary description (narration) for both debit and credit transactions.

What is general ledger example? ›

There are many examples of a general ledger as they record every financial transaction of a firm. Furniture account, salary account, debtor account, owner's equity, etc., are some examples.

What is accrual accounting? ›

Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made. The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.

How do small business maintain books of accounts? ›

The following tips will help for efficient bookkeeping and maintain proper books of account:
  1. Decide on the Method of Bookkeeping. ...
  2. Decide the Mode of Accounting. ...
  3. Open a Separate Bank Account. ...
  4. Establish your Methods of Receiving Payment. ...
  5. Keep Track of the Expenses. ...
  6. Record Transactions in a Timely Manner.
3 May 2022

How do you balance books of accounts? ›

13 Accounting Tips for Small Businesses to Keep the Books Balanced
  1. Pay Close Attention to Receivables. ...
  2. Keep a Pulse on Your Cash Flow. ...
  3. Log Expense Receipts. ...
  4. Record Cash Expenses. ...
  5. Know the Difference Between Invoices and Receipts. ...
  6. Keep Personal vs. ...
  7. Hire a Professional to Handle Your Taxes.
27 Apr 2019

What is the normal balance for expenses? ›

normal balance in Accounting

The normal balance for asset and expense accounts is the debit side, while for income, equity, and liability accounts it is the credit side.

What is the basic accounting equation formula? ›

Also known as the balance sheet equation, the accounting equation formula is Assets = Liabilities + Equity.

What are the 3 formulas of accounting equation? ›

What Are the 3 Elements of the Accounting Equation? The three elements of the accounting equation are assets, liabilities, and shareholders' equity. The formula is straightforward: A company's total assets are equal to its liabilities plus its shareholders' equity.

What are the basic financial calculations? ›

Given below are 10 such formulae that everyone should know.
  • Compound Interest. ...
  • Formula: A = P * (1+r/t) ^ (nt) ...
  • We invest thinking about probable returns that can be generated. ...
  • Formula = Interest rate - (Interest rate*tax rate) ...
  • Inflation. ...
  • Formula: Future amount = Present amount * (1+inflation rate) ^number of years.
4 Nov 2015

What are two formulas you can use to check your work in accounting? ›

The 6 Most Important Accounting Formulas You'll Ever Need to Know
  • » MORE: NerdWallet's best small-business apps.
  • Assets = Liabilities + Equity.
  • What you own (assets) = What you owe (liabilities) + Your contributions or retained earnings in the business (equity)
  • Current Assets / Current Liabilities = Current Ratio.

What are the two types of assets? ›

The two main types of assets are current assets and non-current assets. These classifications are used to aggregate assets into different blocks on the balance sheet, so that one can discern the relative liquidity of the assets of an organization.

What are the four basic financial statement? ›

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity.

What Every Accountant Should Know? ›

An accountant should know how to prepare financial statements and accounting reports for planning, controlling, budgeting and decision-making. The three key financial statements are balance sheet, profit & loss and cash flows account. These above three financial statements are interlinked with each other.

Is capital an asset or liabilities? ›

Even though capital is invested in the form of cash and assets, it is still considered to be a liability. This is because the business is always in the obligation to repay the owner of the capital. So, from the perspective of accounting, capital is always a liability to the business.

What is different between debit and credit? ›

When you use a debit card, the funds for the amount of your purchase are taken from your checking account in almost real time. When you use a credit card, the amount will be charged to your line of credit, meaning you will pay the bill at a later date, which also gives you more time to pay.

Is equity and capital the same? ›

Equity represents the total amount of money a business owner or shareholder would receive if they liquidated all their assets and paid off the company's debt. Capital refers only to a company's financial assets that are available to spend.

What's the 50 30 20 budget rule? ›

The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt. By regularly keeping your expenses balanced across these main spending areas, you can put your money to work more efficiently.

What is cash flow formula? ›

To calculate free cash flow, add your net income and non-cash expenses, then subtract your change in working capital and capital expenditure.

What is the formula for calculating monthly payments? ›

If you want to do the math to calculate monthly payments on a loan, you can use the following formula: a/{[(1+r)^n]-1}/[r(1+r)^n]=p. In this equation "a" is the loan amount, and "r" is the interest rate (as a decimal) divided by the number of payments in a year.

What is basic accounting? ›

Basic accounting refers to the process of recording a company's financial transactions. It involves analyzing, summarizing and reporting these transactions to regulators, oversight agencies and tax collection entities.

What are journal entries? ›

Each journal entry contains the data significant to a single business transaction, including the date, the amount to be credited and debited, a brief description of the transaction and the accounts affected.

How do I calculate total assets? ›

Determine total assets by combining your liabilities with your equity. Because liabilities represent a negative value, the simplest method for finding total assets with this formula is to subtract the value of liabilities from the value of equity or assets. The resulting figure equals your total assets.

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