Accounting Principles Cheat Sheet

Mastering accounting involves understanding core principles like the fraud triangle, accurate recording of transactions, and various methods for inventory valuation and asset depreciation to ensure financial statements reflect a company's true economic position.

Core Principles

Fraud Triangle: Fraud occurs when Opportunity (situation allows fraud), Motivation (need to commit fraud), and Rationalization (justification for fraud) all exist.
Bank Reconciliation: Matches cash balances between bank statements and company books by accounting for discrepancies like deposits in transit and outstanding checks.
Inventory Costing Methods (FIFO, LIFO, Weighted-Average): Different methods assign costs to inventory and cost of goods sold, impacting reported profit and inventory value.
Depreciation Methods (Straight-Line, Double Declining-Balance, Activity-Based): These methods allocate the cost of a tangible asset over its useful life.
Return on Assets (ROA): Measures how efficiently a company uses its assets to generate profit.

Action Steps

Reconcile bank statements monthly by comparing bank and book balances, adjusting for items like deposits in transit, outstanding checks, EFT collections, NSF checks, service charges, and errors.
Calculate depreciation expense using the straight-line, double declining-balance, or activity-based method to allocate asset costs over their useful lives.
Record sales transactions, including credit sales, sales returns, sales allowances, and sales discounts, ensuring accurate accounts receivable and revenue recognition.
Apply FIFO, LIFO, or weighted-average cost methods to determine the cost of goods sold and ending inventory.
Calculate the Receivables Turnover Ratio and Average Collection Period to assess how efficiently a company collects its receivables.

Formulas

Net Sales = Sales - Sales Discounts - Sales Returns and Allowances
Receivables Turnover Ratio = Net credit sales / Average accounts receivable
Average Collection Period = 365 days / Receivables turnover ratio
Inventory Turnover Ratio = Cost of goods sold / Average inventory
Average Days in Inventory = 365 / Inventory turnover ratio
Gross Profit Ratio = Gross profit / Net sales
Goodwill = Purchase Price - Fair value of the net assets acquired
Return on Assets = Profit margin x Asset turnover = Net income / Average total assets

Key Terms

Fraud Triangle: A model that explains the conditions under which fraud occurs: opportunity, motivation, and rationalization.
Bank Reconciliation: A process to reconcile the cash balance on a company's books with the balance on its bank statement.
FIFO (First-In, First-Out): An inventory costing method that assumes the first goods purchased are the first ones sold.
LIFO (Last-In, First-Out): An inventory costing method that assumes the last goods purchased are the first ones sold.
Weighted-Average Cost: An inventory costing method that uses the weighted-average cost of all goods available for sale during the period.
Straight-Line Depreciation: A depreciation method that allocates an equal amount of depreciation expense to each year of an asset's useful life.
Double Declining-Balance Depreciation: An accelerated depreciation method that depreciates assets at twice the rate of the straight-line method.
Activity-Based Depreciation: A depreciation method where expense is based on the asset's usage, such as hours of operation or units produced.
Allowance for Uncollectible Accounts (AFUA): A contra-asset account that reduces the total accounts receivable to their estimated collectible amount.
Receivables Turnover Ratio: A measure of how efficiently a company collects its accounts receivable.
Inventory Turnover Ratio: A measure of how many times a company sells its average inventory balance during a reporting period.
Return on Assets (ROA): A profitability ratio that measures how efficiently a company uses its assets to generate profit.

Real World Examples

Wolfpack, Inc. prepares its February bank reconciliation, identifying a cash balance per bank of $31,800 and per books of $17,600, with deposits in transit of $2,400 and outstanding checks of $12,000.: By adjusting the bank balance for deposits in transit and outstanding checks, and the book balance for items like notes collected by the bank and bank charges, Wolfpack, Inc. arrives at a correct cash balance of $22,200 for both.
F.Y.Eye sells sunglasses for $200 on account and later accepts a return of the merchandise.: F.Y.Eye records a debit to Sales Returns and a credit to Accounts Receivable for $200 to account for the customer's return.
Payne issues a six-month note to Kimzey for $10,000 with 12% interest on November 1, 2024. The note is due May 1, 2025.: Kimzey accrues $200 in interest revenue on December 31, 2024 (2 months of interest) and records the full collection of $10,600 ($10,000 principal + $600 interest) on May 1, 2025.
ACC Corporation has inventory transactions throughout the year and sells 200 units for $50 each. Using FIFO, the ending inventory is calculated based on the most recent purchases.: Under FIFO, ending inventory is valued at $1,110, cost of goods sold is $6,760, sales revenue is $10,000, and gross profit is $3,240.
A machine purchased for $110,000 with a $10,000 salvage value and a 5-year life is used for 10,000 hours in 2024 and 25,000 hours in 2025.: Using the activity-based method, depreciation expense is $10,000 in 2024 (10,000 hours x $1.00/hour) and $25,000 in 2025 (25,000 hours x $1.00/hour).