Accounting quick reference

37 topics, one line each, in the order Hone teaches them.

Hone is a place to practise a career, one idea a day. This sheet is the whole Accounting track at a glance: every idea it covers, in the order they are taught, one line each. It is a map rather than a lesson. Read opens the full explanation of an idea; Practise gives you a question on it. Both are free, and reading needs no account at all.

From the first entry to a set of statements · The equation

the accounting equationWhat the business has equals what it owes plus what is left over for the owner: Assets = Liabilities + Equity. Read: The one equation the whole of accounting sits on · Practise the accounting equation

assets, liabilities and equity in plain wordsAn asset is something the business has that is worth money. A liability is money the business owes. Equity is what would be left for the owner if everything were sold and every debt paid. Read: Assets, liabilities, equity: the three words in plain English · Practise assets, liabilities and equity in plain words

every transaction has two sidesMoney always comes from somewhere and goes somewhere, so every transaction changes at least two accounts, and the equation stays true afterwards. Read: Every transaction touches at least two accounts · Practise every transaction has two sides

the five kinds of accountEvery account is one of five: asset, liability, equity, revenue or expense. Revenue and expenses are equity's story told in detail for one year. Read: The five kinds of account · Practise the five kinds of account

normal balancesAn account's normal balance is the side of the equation it sits on: assets on the left, liabilities and equity on the right. Expenses follow assets (left); revenue follows equity (right). Left is called debit, right is called credit. Read: Normal balance: the side each account expects to live on · Practise normal balances

From the first entry to a set of statements · Debits and credits

debit is left, credit is rightA debit is an entry on the left-hand side of an account and a credit is an entry on the right-hand side. Neither is good or bad, more or less. Read: Debit means left. Credit means right. That is all. · Practise debit is left, credit is right

which side makes an account biggerA debit increases assets and expenses. A credit increases liabilities, equity and revenue. To make any account smaller, use the other side. Read: Which side makes it bigger · Practise which side makes an account bigger

the journal entryA journal entry records one transaction: the date, the account debited on the first line, the account credited indented beneath it, equal totals, and a short note saying what happened. Read: The journal entry: date, debit, credit, and a line of why · Practise the journal entry

posting to the ledgerThe journal is a diary in date order. The ledger is one page per account. Posting copies each side of each entry onto its account's page, so every account can show a balance. Read: Posting: from the journal to the ledger · Practise posting to the ledger

the trial balanceA trial balance lists every ledger account's balance in a debit column or a credit column. If the two columns add to the same total, every entry was posted with equal debits and credits. It does not prove the entries were right. Read: The trial balance: what it proves, and what it cannot · Practise the trial balance

From the first entry to a set of statements · Everyday entries

a cash saleWhen a customer pays at the moment of sale, cash goes up and revenue goes up: Dr Cash, Cr Sales revenue. Read: A cash sale · Practise a cash sale

a sale on credit and the receivableWhen a customer will pay later, record the sale now and an asset called accounts receivable, which is the customer's promise to pay. When the cash arrives, swap the promise for cash. Read: A sale on credit: the receivable · Practise a sale on credit and the receivable

buying on account and the payableWhen the business gets something now and pays later, record what it got now and a liability called accounts payable: Dr the thing received, Cr Accounts payable. Read: Buying on account: the payable · Practise buying on account and the payable

paying a payablePaying a supplier does not create an expense; the expense was recorded when the bill arrived. Paying it swaps cash for a smaller liability: Dr Accounts payable, Cr Cash. Read: Paying what you owe · Practise paying a payable

the owner puts money inMoney the owner puts into the business is not revenue; it is equity: Dr Cash, Cr Owner's capital. Money the owner takes out is drawings, and it reduces equity. Read: The owner puts money in · Practise the owner puts money in

recording an expenseAn expense is a cost of running the business this period. It goes up on the debit side, and whatever paid for it, cash or a payable, is credited. Read: Recording an expense · Practise recording an expense

the bank reconciliationThe bank's balance and the book's balance differ for reasons you can list. A reconciliation adjusts each side for what the other has not seen yet, until they meet. Anything left over is an error. Read: The bank reconciliation, in steps · Practise the bank reconciliation

From the first entry to a set of statements · Adjusting and closing

accrual versus cashUnder cash accounting a sale or a cost counts when the money moves. Under accrual accounting it counts when it is earned or used up, whichever month the cash happens to move in. Read: Accrual versus cash: when does it count? · Practise accrual versus cash

prepaid expensesPaying ahead buys an asset, the right to something not yet used. Each month, move the part that has been used out of the asset and into expense. Read: Prepaid expenses: paid now, used later · Practise prepaid expenses

unearned revenueMoney received before the work is done is a liability, because you owe the work. As the work is done, move it out of the liability and into revenue. Read: Unearned revenue: paid before you have earned it · Practise unearned revenue

accrued wagesIf the period ends before payday, the wages earned so far belong to this period as an expense, and are a liability until the payday that settles them. Read: Accrued wages: worked, not yet paid · Practise accrued wages

straight-line depreciationAn asset that will last for years is expensed a little each year: cost minus salvage value, divided by useful life. The expense goes to depreciation expense and the other side to accumulated depreciation, which sits under the asset. Read: Straight-line depreciation · Practise straight-line depreciation

closing the booksAt year-end the revenue and expense accounts are emptied into equity, so they start the new year at zero. Balance sheet accounts are never closed; they carry on. Read: Closing the books: revenue and expenses go to equity · Practise closing the books

From the first entry to a set of statements · The statements

the income statementRevenue for the period, less the expenses of the period, gives the profit or loss for the period. Sales less cost of goods sold is gross profit; gross profit less operating expenses is net profit. Read: The income statement: what you earned and what it cost · Practise the income statement

the balance sheetA balance sheet is a snapshot on one date: assets on one side, liabilities and equity on the other, and the two sides total the same because of the equation. Read: The balance sheet: what you have and what you owe, on one day · Practise the balance sheet

how the statements tie through equityThis period's profit from the income statement flows into equity on the balance sheet: closing equity equals opening equity plus profit, plus what the owner put in, minus what the owner took out. Read: How the statements tie together through equity · Practise how the statements tie through equity

cash flow in three bucketsEvery cash movement goes in one of three buckets: operating (running the business), investing (buying and selling long-lived things) and financing (money from and to owners and lenders). The three add up to the change in cash for the period. Read: Cash flow in three buckets · Practise cash flow in three buckets

gross margin and net marginA margin is profit as a share of sales. Gross margin is gross profit divided by sales; net margin is net profit divided by sales. Read: Gross margin and net margin · Practise gross margin and net margin

current ratio, quick ratio, debt-to-equityCurrent ratio is current assets over current liabilities: can the business pay what is due this year. Quick ratio takes inventory out of the top, because stock is slow to turn into cash. Debt-to-equity is total liabilities over equity: how much of the business the lenders already own. Read: Three ratios a lender reads first · Practise current ratio, quick ratio, debt-to-equity

From the first entry to a set of statements · Working with the numbers

inventory: FIFO and LIFOWhen identical units were bought at different prices, the books need a rule for which cost goes out with each sale. FIFO takes the oldest cost first; LIFO takes the newest. The rule changes cost of goods sold and what is left in inventory, not what is on the shelf. Read: FIFO and LIFO: which cost leaves first · Practise inventory: FIFO and LIFO

inventory: weighted average costAdd up everything spent on the units, divide by the number of units, and use that one average cost for every unit sold and every unit left. Read: Weighted average cost · Practise inventory: weighted average cost

break-even in units and in salesEach unit sold contributes its price less its variable cost. Break-even units is fixed costs divided by that contribution; break-even sales is those units times the price. Read: Break-even: how many you must sell to cover the costs · Practise break-even in units and in sales

markup versus marginMarkup is profit as a share of cost. Margin is profit as a share of price. The same sale gives two different percentages, and each has its own use. Read: Markup and margin are not the same number · Practise markup versus margin

simple interestSimple interest is the amount borrowed, times the yearly rate, times the time in years: I = P × r × t. Read: Simple interest · Practise simple interest

present value of one sumMoney later is worth less than money now, because money now could be earning. The present value of a future sum is that sum divided by (1 + rate) once for every period you wait: PV = FV / (1 + r)^n. Read: Present value of one sum · Practise present value of one sum

payroll: gross pay to net payGross pay is what the worker earned. Withholdings are taken out of it and held for whoever they are owed to. Net pay is what reaches the worker. The expense is the gross; the withholdings are a liability until they are sent on. Read: Payroll: from gross pay to net pay · Practise payroll: gross pay to net pay

sales tax on a saleTax collected on a sale is not revenue. It belongs to the tax authority and is a liability until it is paid over: Dr Cash for the total, Cr Sales revenue for the price, Cr Sales tax payable for the tax. Read: Sales tax on a sale · Practise sales tax on a sale