Know the basic equation of accounting (Assets= Liabilities+Stockholders’ Equity)
Know that Stockholders Equity is equal to common stock plus retained earnings
Know that Retained Earnings = Expenses and Dividends subtracted from Revenues When you increase cash it is a debit and when you decrease cash it is a credit
Increases in Liabilities are entered as credits and Decreases in Liabilities are entered as debits
The normal balance is the side which is becoming increased
Retained earnings are net income that is retained in the business. It represents the portion of stockholders' equity that has been accumulated through the profitable operation of the company. Retained Earnings is increased by credits (for example, by net income) and decreased by debits (for example, by a net loss)
Dividends account normally has a debit balance
Credits to revenue accounts should exceed debits; debits to expense accounts should exceed credit
Debit and Credit Rules
Steps in the Recording process
1. Analyse each Transaction in terms of its effects on the accounts
2. Enter the transaction information in a journal
3.Transfer the Journal entry information to the appropriate accounts in the ledger
Basic Sample Journal
Note the following features of the journal entries.
The date of the transaction is entered in the Date column.
The account to be debited is entered first at the left. The account to be credited is then entered on the next line, indented under the line above. The indentation differentiates debits from credits and decreases the possibility of switching the debit and credit amounts.
The amounts for the debits are recorded in the Debit (left) column, and the amounts for the credits are recorded in the Credit (right) column.
A brief explanation of the transaction is given.
A trial balance lists accounts and their balances at a given time
Note that debits value is equal to credit value
Chapter 4 Accrual Accounting
The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
Remember that Expenses always match Revenues in the recording process
This concept is known as the Expense recognition principle
Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged. For example, using the accrual basis means that companies recognize revenues when they perform the services (the revenue recognition principle), even if cash was not received. Likewise, under the accrual basis, companies recognize expenses when incurred (the expense recognition principle), even if cash was not paid. Under cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash. The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements. It fails to record revenue for a company that has performed services but has not yet received the cash. As a result, it does not match expenses with revenues. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).
In order for revenues to be recorded in the period in which the performance obligations are satisfied, and for expenses to be recognized in the period in which they are incurred, companies make adjusting entries. Adjusting entries ensure that the revenue recognition and expense recognition principles are followed.
Adjusting entries are classified as either deferrals or accruals
Types of Accruals- Interest, Taxes, utilities and salaries
How to report interest payments:
In this case you would debit Interest expenses by $50 and credit Interest Payable $50
Sample Adjustment Entry: