Accounting Fundamentals Cheat Sheet

Master the accounting equation (Assets = Liabilities + Owner's Equity) and the debit/credit system (DEAD CLIC) to understand how business transactions impact financial statements.

Core Principles

The accounting equation, Assets = Liabilities + Owner's Equity, is the foundation of all financial accounting.
Debits increase Dividends, Expenses, Assets, and Drawings; Credits increase Capital, Liabilities, Income, and Revenue (DEAD CLIC).
Transactions are recorded using debits and credits, affecting at least two accounts to maintain the accounting equation's balance.
Financial statements (Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows) present a company's financial health in a specific order.

Action Steps

Memorize the accounting equation: Assets = Liabilities + Owner's Equity.
Memorize the debit/credit rule: DEAD CLIC (Dividends, Expenses, Assets, Drawings increase with Debits; Capital, Liabilities, Income, Revenue increase with Credits).
Analyze each transaction to identify which accounts are affected and whether they increase or decrease.
Record transactions using debits and credits, ensuring total debits equal total credits.
Prepare financial statements in the correct order: Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows.
Understand and apply inventory methods (FIFO, LIFO, Weighted Average) and depreciation methods (Straight-line).

Formulas

Accounting Equation: $Assets = Liabilities + Owner's Equity$
Expanded Accounting Equation: $Assets = Liabilities + Contributed Capital + Revenues - Expenses - Dividends$
Straight-line Depreciation: $\frac{Cost - Salvage Value}{Useful Life}$
Current Ratio: $Current Assets \div Current Liabilities$
Gross Profit Margin: $Gross Profit \div Net Sales$
Debt Ratio: $Total Liabilities \div Total Assets$
Return on Assets: $Net Income \div Average Total Assets$

Key Terms

Assets: What a company owns.
Liabilities: What a company owes.
Owner's Equity: The owner's claim on the business.
DEAD CLIC: Mnemonic for remembering which accounts increase with Debits (Dividends, Expenses, Assets, Drawings) and Credits (Capital, Liabilities, Income, Revenue).
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 of depreciation that spreads the cost of an asset evenly over its useful life.
Accrued revenue: Revenue earned but not yet received or recorded.
Accrued expenses: Expenses incurred but not yet paid or recorded.

Real World Examples

A company buys equipment for $10,000 cash.: Equipment (Asset) increases by $10,000 (Debit), and Cash (Asset) decreases by $10,000 (Credit).
A company makes a sale for $5,000 on credit.: Accounts Receivable (Asset) increases by $5,000 (Debit), and Sales Revenue (Income) increases by $5,000 (Credit).
A company pays $2,000 in salaries.: Salaries Expense (Expense) increases by $2,000 (Debit), and Cash (Asset) decreases by $2,000 (Credit).
A machine costing $50,000 with a $5,000 salvage value and a 5-year useful life needs depreciation.: Annual depreciation is ($50,000 - $5,000) / 5 = $9,000. Depreciation Expense increases by $9,000 (Debit), and Accumulated Depreciation increases by $9,000 (Credit).