Accounting Fundamentals Cheat Sheet

The accounting equation (Assets = Liabilities + Owner's Equity) and the debit/credit system (DEAD CLIC) are the foundational pillars for understanding financial transactions and statements.

Core Principles

Accounting Equation: Assets = Liabilities + Owner's Equity, representing what a company owns, owes, and the owner's claim.
Debits & Credits (DEAD CLIC): Understand how Debits increase Dividends, Expenses, Assets, Drawings, and Credits increase Capital, Liabilities, Income.

Action Steps

1. Memorize the basic accounting equation: Assets = Liabilities + Owner's Equity.
2. Memorize the DEAD CLIC rule for debits and credits to understand account balance changes.
3. Understand the order of financial statements: Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows.
4. Learn the FIFO and LIFO inventory methods and their impact during inflation.
5. Calculate straight-line depreciation using the formula: (Cost - Salvage Value) / Useful Life.
6. Differentiate between the direct write-off and allowance methods for bad debt expense.
7. Recognize when bonds are issued at a discount (Market Rate > Bond Rate) or premium (Bond Rate > Market Rate).
8. Memorize key financial ratios like Current Ratio, Gross Profit Margin, Debt Ratio, and Return on Assets.

Formulas

Accounting Equation: $A = L + OE$
Expanded Accounting Equation: $A = L + CC + R - E - D$
Straight-line Depreciation: $\text{Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$

Key Terms

Assets: What a company owns.
Liabilities: What a company owes.
Owner's Equity: The owner's claim on the business.
DEAD CLIC: A mnemonic for remembering debit and credit effects: Debits increase Dividends, Expenses, Assets, Drawings; Credits increase Capital, Liabilities, Income.
FIFO: First-In, First-Out inventory method, assuming the oldest inventory is sold first.
LIFO: Last-In, First-Out inventory method, assuming the newest inventory is sold first.
Straight-line depreciation: A method that depreciates an asset evenly over its useful life.
Allowance method: Estimates uncollectible accounts in advance, creating an allowance for doubtful accounts.

Real World Examples

A company buys equipment for $50,000 with a salvage value of $5,000 and a useful life of 5 years.: Using straight-line depreciation, the annual depreciation expense is ($50,000 - $5,000) / 5 = $9,000.
During inflation, a company uses the FIFO inventory method.: This results in a lower cost of goods sold, higher net income, and a higher ending inventory value.
A company's market interest rate for bonds is 8%, but its bond interest rate is 6%.: The bond will be issued at a discount because the market rate is higher than the bond's stated rate.