Accounting
Welcome to the world of accounting! Whether you’re starting a business, managing finances, or just want to understand how money flows through organizations, this Quick Start guide will give you the foundation you need.
By the end of this tutorial, you’ll understand how businesses track their financial activities, how to read financial statements, and how to apply accounting principles in real-world scenarios.
🎯 What You’ll Learn
- Understand the fundamental accounting equation and why it always balances
- Master double-entry bookkeeping and the logic behind debits and credits
- Create and interpret financial statements (balance sheet, income statement, cash flow)
- Apply accounting principles like accrual basis and matching principle
- Practice recording real business transactions from start to finish
- Read and analyze financial health through financial statements
📚 Prerequisites
Knowledge Prerequisites:
- Basic arithmetic (addition, subtraction, multiplication, division)
- Understanding of business concepts (revenue, expenses, assets)
- Familiarity with spreadsheets is helpful but not required
Tools Required:
- Pen and paper for exercises (or spreadsheet software)
- Calculator
Optional (Helpful):
- Basic understanding of business operations
- Curiosity about how businesses track money
🏗️ What We’re Building
Throughout this tutorial, we’ll follow “Tech Haven”, a small computer repair shop, as it goes through its first month of business. You’ll record every transaction, create financial statements, and learn to interpret what the numbers tell us about the business’s health.
By the end, you’ll have:
- Complete accounting records for Tech Haven’s first month
- Three core financial statements (balance sheet, income statement, cash flow)
- Understanding of how transactions flow through the accounting system
- Confidence to track finances for any small business
flowchart TD A[Business Transaction] --> B[Analyze Transaction] B --> C[Record in Journal] C --> D[Post to Ledger] D --> E[Prepare Trial Balance] E --> F[Create Financial Statements] F --> G[Analyze Financial Health] style A fill:#0173B2,stroke:#000000,color:#FFFFFF style G fill:#029E73,stroke:#000000,color:#FFFFFF
The diagram above shows the complete accounting cycle we’ll master in this tutorial.
📖 Section 1: The Accounting Equation - Your Foundation
Every accounting system in the world is built on one simple equation. Master this, and everything else will make sense.
The Magic Equation
What does this mean?
- Assets = What the business owns (cash, equipment, inventory, etc.)
- Liabilities = What the business owes (loans, bills to pay, etc.)
- Equity = What the owners own (investment + profits)
Why it always balances:
Think of it this way: Everything a business owns (assets) was either borrowed (liabilities) or invested/earned by the owners (equity). There’s no other source of money!
Real-World Example
Let’s start Tech Haven:
Transaction 1: Owner invests $10,000 cash to start the business.
Before:
Assets = $0
Liabilities = $0
Equity = $0
After:
Assets = $10,000 (cash)
Liabilities = $0
Equity = $10,000 (owner investment)
Check: $10,000 = $0 + $10,000 ✓Transaction 2: Business borrows $5,000 from bank.
After:
Assets = $15,000 (cash increased by $5,000)
Liabilities = $5,000 (bank loan)
Equity = $10,000 (unchanged)
Check: $15,000 = $5,000 + $10,000 ✓Transaction 3: Business buys equipment for $3,000 cash.
After:
Assets = $15,000 ($12,000 cash + $3,000 equipment)
Liabilities = $5,000 (unchanged)
Equity = $10,000 (unchanged)
Check: $15,000 = $5,000 + $10,000 ✓Notice: Assets changed form (cash → equipment) but total stayed the same!
Visual Representation
flowchart TD subgraph "The Accounting Equation" A[Assets<br/>$15,000] L[Liabilities<br/>$5,000] E[Equity<br/>$10,000] end A -.Equal to.-> Sum[Liabilities + Equity<br/>$15,000] L --> Sum E --> Sum style A fill:#0173B2,stroke:#000000,color:#FFFFFF style L fill:#DE8F05,stroke:#000000,color:#FFFFFF style E fill:#029E73,stroke:#000000,color:#FFFFFF style Sum fill:#DE8F05,stroke:#000000,color:#FFFFFF
✓ Checkpoint
What you’ve learned:
- The accounting equation is the foundation of all accounting
- Assets = Liabilities + Equity ALWAYS
- Every transaction affects at least two parts of the equation
- The equation must always balance
Practice: If a business has 20,000 in liabilities, what is the equity?
Solution
📖 Section 2: Double-Entry Bookkeeping - The System That Never Lies
Now that you understand the equation, let’s learn the system that keeps it balanced automatically.
The Core Principle
Every transaction has two sides:
- Something received (debit)
- Something given (credit)
The rule: For every transaction, total debits = total credits
This isn’t opinion or preference—it’s the mathematical law that makes accounting work.
Account Types and Their Normal Balances
Different types of accounts increase and decrease differently:
flowchart TD subgraph "Asset Accounts" A1[Debit = Increase] A2[Credit = Decrease] A1 --> A2 end subgraph "Liability Accounts" L1[Credit = Increase] L2[Debit = Decrease] L1 --> L2 end subgraph "Equity Accounts" E1[Credit = Increase] E2[Debit = Decrease] E1 --> E2 end subgraph "Revenue Accounts" R1[Credit = Increase] R2[Debit = Decrease] R1 --> R2 end subgraph "Expense Accounts" X1[Debit = Increase] X2[Credit = Decrease] X1 --> X2 end style A1 fill:#0173B2,stroke:#000000,color:#FFFFFF style L1 fill:#DE8F05,stroke:#000000,color:#FFFFFF style E1 fill:#029E73,stroke:#000000,color:#FFFFFF style R1 fill:#CC78BC,stroke:#000000,color:#FFFFFF style X1 fill:#DE8F05,stroke:#000000,color:#FFFFFF
Memory aid:
- DEAD CLIC (Debit: Expenses, Assets, Drawings | Credit: Liabilities, Income, Capital)
- Assets and Expenses behave the same (debit increases)
- Liabilities, Equity, and Revenue behave the same (credit increases)
⚠️ Common Mistake: Many beginners try to think “debit = bad, credit = good” from everyday banking language. This doesn’t work in accounting!
In accounting:
- Debits are NOT bad - they just mean “left side”
- Credits are NOT good - they just mean “right side”
Think of debits and credits as directions (left vs right) rather than value judgments (good vs bad).
Tip: Focus on memorizing what each side increases:
- Left (Debit) increases: Assets & Expenses
- Right (Credit) increases: Liabilities, Equity & Revenue
Once you know this, you can figure out what decreases each account (opposite side).
Why This Makes Sense
Think about your personal checking account:
- When you deposit money (increase asset), the bank debits your account
- When you withdraw money (decrease asset), the bank credits your account
This seems backward because you’re looking at the bank’s books, not yours! From the bank’s perspective, your deposit is their liability (they owe you), so they credit it.
Recording Transactions
Transaction: Tech Haven pays $800 cash for rent.
Analysis:
- What happened? Cash decreased, rent expense increased
- Which accounts? Cash (asset), Rent Expense (expense)
- Debit or credit? Cash decreases (credit), Rent Expense increases (debit)
Journal Entry:
Date: Jan 5, 2025
Description: Paid monthly rent
Account Debit Credit
Rent Expense $800
Cash $800
(To record payment of monthly rent)Check:
- Total debits = $800
- Total credits = $800
- ✓ Balanced!
Practice Entry
Transaction: Tech Haven repairs a customer’s computer and receives $150 cash.
Try it yourself before looking:
Solution
Date: Jan 6, 2025
Description: Computer repair service
Account Debit Credit
Cash $150
Service Revenue $150
(To record repair service revenue)Why?
- Cash increased (asset increase = debit)
- Service Revenue increased (revenue increase = credit)
✓ Checkpoint
What you’ve learned:
- Every transaction has equal debits and credits
- Assets and expenses increase with debits
- Liabilities, equity, and revenue increase with credits
- The system self-checks because debits must equal credits
📖 Section 3: Chart of Accounts - Organizing Your Records
Before we start recording lots of transactions, we need an organized filing system for our accounts.
What Is a Chart of Accounts?
A chart of accounts is a complete list of all accounts your business uses, organized by type and numbered for easy reference.
Standard Numbering System
1000-1999: Assets
2000-2999: Liabilities
3000-3999: Equity
4000-4999: Revenue
5000-5999: ExpensesTech Haven’s Chart of Accounts
ASSETS (1000-1999)
1000 - Cash
1100 - Accounts Receivable
1200 - Inventory (Computer Parts)
1300 - Prepaid Rent
1500 - Equipment
1550 - Accumulated Depreciation - Equipment
LIABILITIES (2000-2999)
2000 - Accounts Payable
2100 - Bank Loan Payable
2200 - Unearned Revenue
EQUITY (3000-3999)
3000 - Owner's Capital
3100 - Owner's Drawings
3900 - Retained Earnings
REVENUE (4000-4999)
4000 - Service Revenue
4100 - Parts Sales Revenue
EXPENSES (5000-5999)
5000 - Rent Expense
5100 - Utilities Expense
5200 - Wages Expense
5300 - Supplies Expense
5400 - Depreciation Expense
5500 - Interest ExpenseVisual Organization
flowchart TD subgraph "1000: Assets" A1[1000 Cash] A2[1100 Accounts Receivable] A3[1500 Equipment] end subgraph "2000: Liabilities" L1[2000 Accounts Payable] L2[2100 Bank Loan] end subgraph "3000: Equity" E1[3000 Owner's Capital] E2[3900 Retained Earnings] end subgraph "4000: Revenue" R1[4000 Service Revenue] R2[4100 Parts Sales] end subgraph "5000: Expenses" X1[5000 Rent] X2[5200 Wages] X3[5400 Depreciation] end style A1 fill:#0173B2,stroke:#000000,color:#FFFFFF style L1 fill:#DE8F05,stroke:#000000,color:#FFFFFF style E1 fill:#029E73,stroke:#000000,color:#FFFFFF style R1 fill:#CC78BC,stroke:#000000,color:#FFFFFF style X1 fill:#DE8F05,stroke:#000000,color:#FFFFFF
Why Numbering Matters
Benefits:
- Organization: Assets always start with 1, revenue with 4, etc.
- Sorting: Computer systems can automatically sort by account type
- Scalability: Can add accounts between existing numbers (1150, 1160, etc.)
- Communication: Everyone knows what “account 1000” means
✓ Checkpoint
What you’ve learned:
- Chart of accounts organizes all business accounts
- Standard numbering: 1000s (assets), 2000s (liabilities), 3000s (equity), 4000s (revenue), 5000s (expenses)
- Numbering allows for easy expansion and organization
- Each business customizes their chart based on needs
You now understand:
You’ve mastered the first three building blocks of accounting! You know:
- The accounting equation - the fundamental rule (Assets = Liabilities + Equity)
- Double-entry bookkeeping - how to keep the equation balanced (debits and credits)
- Chart of accounts - how to organize financial information
Next, you’ll put these concepts into practice by recording real business transactions!
📖 Section 4: Recording Transactions - Your First Month
Now we’ll record Tech Haven’s first month of business transactions step by step.
Journal Entry Format
Every journal entry includes:
- Date of transaction
- Account names (debit accounts listed first)
- Amounts (debits in left column, credits in right column, indented)
- Description explaining the transaction
Tech Haven’s January 2025 Transactions
Let’s record all transactions chronologically.
Jan 1: Owner invests $10,000 cash
Date: Jan 1, 2025
Account Debit Credit
1000 Cash $10,000
3000 Owner's Capital $10,000
(Owner investment to start business)Jan 2: Borrow $5,000 from bank
Date: Jan 2, 2025
Account Debit Credit
1000 Cash $5,000
2100 Bank Loan $5,000
(Loan from First National Bank, 6% annual interest)Jan 3: Purchase equipment for $3,000 cash
Date: Jan 3, 2025
Account Debit Credit
1500 Equipment $3,000
1000 Cash $3,000
(Purchased diagnostic equipment and tools)Jan 5: Pay $800 for first month’s rent
Date: Jan 5, 2025
Account Debit Credit
5000 Rent Expense $800
1000 Cash $800
(Paid January rent for shop space)Jan 8: Buy computer parts inventory for $2,000 cash
Date: Jan 8, 2025
Account Debit Credit
1200 Inventory $2,000
1000 Cash $2,000
(Purchased parts for customer repairs)Jan 10: Complete repair job, receive $150 cash
Date: Jan 10, 2025
Account Debit Credit
1000 Cash $150
4000 Service Revenue $150
(Laptop repair for walk-in customer)Jan 12: Complete repair job, customer will pay later ($300)
Date: Jan 12, 2025
Account Debit Credit
1100 Accounts Receivable $300
4000 Service Revenue $300
(Desktop repair for business customer, terms net 30)Jan 15: Pay employee wages $600 cash
Date: Jan 15, 2025
Account Debit Credit
5200 Wages Expense $600
1000 Cash $600
(Wages for part-time technician, first half of month)Jan 18: Sell computer parts for 250)
Date: Jan 18, 2025
Entry 1 (Record sale):
Account Debit Credit
1000 Cash $400
4100 Parts Sales Revenue $400
(Sold memory modules to customer)
Entry 2 (Record cost):
5300 Cost of Goods Sold $250
1200 Inventory $250
(Cost of parts sold)Note: Two entries needed - one for the sale revenue, one for the cost of inventory sold.
⚠️ Common Mistake: When selling inventory, beginners often forget to record the cost of goods sold. Always make TWO entries:
- Record the sale (Cash/AR → Revenue)
- Record the cost (Cost of Goods Sold → Inventory)
Forgetting the second entry makes your profit look higher than it really is!
Jan 20: Pay $100 for utilities
Date: Jan 20, 2025
Account Debit Credit
5100 Utilities Expense $100
1000 Cash $100
(Electricity and internet for January)Jan 25: Customer pays the $300 owed from Jan 12
Date: Jan 25, 2025
Account Debit Credit
1000 Cash $300
1100 Accounts Receivable $300
(Payment received from business customer)Jan 31: Pay $25 interest on bank loan
Date: Jan 31, 2025
Account Debit Credit
5500 Interest Expense $25
1000 Cash $25
(Monthly interest on bank loan)Jan 31: Owner withdraws $500 for personal use
Date: Jan 31, 2025
Account Debit Credit
3100 Owner's Drawings $500
1000 Cash $500
(Owner withdrawal for personal expenses)Transaction Summary
sequenceDiagram participant Transaction participant Journal participant Ledger participant Financial Statements Transaction->>Journal: 1. Record entry Journal->>Ledger: 2. Post to accounts Ledger->>Financial Statements: 3. Prepare reports Note over Transaction,Financial Statements: The Accounting Cycle
✓ Checkpoint
What you’ve learned:
- How to record journal entries with proper format
- Each entry must have equal debits and credits
- Some transactions need multiple entries (inventory sales)
- Transactions are recorded chronologically in the journal
Practice: Record this transaction: Tech Haven pays $200 for advertising.
Solution
Date: [Today's date]
Account Debit Credit
5XXX Advertising Expense $200
1000 Cash $200
(Paid for online advertising campaign)Note: You’d add “Advertising Expense” to the chart of accounts first (maybe account 5600).
📖 Section 5: The General Ledger - Tracking Account Balances
After recording transactions in the journal, we organize them by account to track balances.
What Is the General Ledger?
The general ledger collects all transactions for each account, showing:
- All debits and credits to the account
- Running balance
- Complete transaction history
Posting to Ledger Accounts
Posting means transferring journal entries to their respective ledger accounts.
Sample Ledger: Cash (Account 1000)
Account: 1000 - Cash
-----------------------------------------------------------
Date Description Debit Credit Balance
-----------------------------------------------------------
Jan 1 Owner investment 10,000 10,000
Jan 2 Bank loan 5,000 15,000
Jan 3 Equipment purchase 3,000 12,000
Jan 5 Rent payment 800 11,200
Jan 8 Inventory purchase 2,000 9,200
Jan 10 Repair revenue 150 9,350
Jan 15 Wages payment 600 8,750
Jan 18 Parts sale 400 9,150
Jan 20 Utilities payment 100 9,050
Jan 25 Customer payment 300 9,350
Jan 31 Interest payment 25 9,325
Jan 31 Owner withdrawal 500 8,825
-----------------------------------------------------------
Final Balance: $8,825 (Debit)Sample Ledger: Service Revenue (Account 4000)
Account: 4000 - Service Revenue
-----------------------------------------------------------
Date Description Debit Credit Balance
-----------------------------------------------------------
Jan 10 Cash repair 150 150
Jan 12 Credit repair 300 450
-----------------------------------------------------------
Final Balance: $450 (Credit)All Account Balances
Assets:
- Cash: $8,825
- Accounts Receivable: $0 (customer paid)
- Inventory: 2,000 - $250 sold)
- Equipment: $3,000
Liabilities:
- Bank Loan Payable: $5,000
Equity:
- Owner’s Capital: $10,000
- Owner’s Drawings: $500
Revenue:
- Service Revenue: $450
- Parts Sales Revenue: $400
Expenses:
- Rent Expense: $800
- Wages Expense: $600
- Utilities Expense: $100
- Interest Expense: $25
- Cost of Goods Sold: $250
Ledger Organization
flowchart TD
J[Journal Entries<br/>Chronological] --> L{Post to Ledger}
L --> A[Asset Accounts]
L --> Li[Liability Accounts]
L --> E[Equity Accounts]
L --> R[Revenue Accounts]
L --> X[Expense Accounts]
A --> TB[Trial Balance]
Li --> TB
E --> TB
R --> TB
X --> TB
style J fill:#0173B2,stroke:#000000,color:#FFFFFF
style TB fill:#029E73,stroke:#000000,color:#FFFFFF
✓ Checkpoint
What you’ve learned:
- The general ledger organizes transactions by account
- Posting transfers journal entries to ledger accounts
- Each account maintains a running balance
- The ledger feeds into the trial balance
📖 Section 6: Trial Balance - Verifying Accuracy
Before preparing financial statements, verify that debits equal credits.
What Is a Trial Balance?
A trial balance lists all accounts with their balances to verify the books are in balance.
Tech Haven Trial Balance - January 31, 2025
Tech Haven Computer Repair
Trial Balance
January 31, 2025
Account Debit Credit
----------------------------------------------------
1000 Cash $8,825
1200 Inventory $1,750
1500 Equipment $3,000
2100 Bank Loan Payable $5,000
3000 Owner's Capital $10,000
3100 Owner's Drawings $500
4000 Service Revenue $450
4100 Parts Sales Revenue $400
5000 Rent Expense $800
5100 Utilities Expense $100
5200 Wages Expense $600
5300 Cost of Goods Sold $250
5500 Interest Expense $25
----------------------------------------------------
TOTALS $15,850 $15,850
====================================================✓ Check: Debits (15,850)
What the Trial Balance Tells You
If it balances:
- ✓ All journal entries posted correctly
- ✓ No arithmetic errors
- ✓ Ready to prepare financial statements
If it doesn’t balance:
- ❌ Look for posting errors
- ❌ Check for transposition errors (reversed digits)
- ❌ Find missing entries
Trial Balance Limitations
What it CATCHES:
- Mathematical errors
- Missing postings
- Wrong debit/credit columns
What it DOESN’T CATCH:
- Wrong account used
- Wrong amounts (if debits still equal credits)
- Duplicate entries
- Completely omitted transactions
✓ Checkpoint
What you’ve learned:
- Trial balance verifies debits equal credits
- It’s prepared before financial statements
- It catches posting and arithmetic errors
- It doesn’t catch all types of errors
Progress Check:
You’re now ready for the most important part - creating financial statements! You’ve completed the entire accounting process from transactions to trial balance:
- ✓ Recorded transactions in journal entries
- ✓ Posted entries to the general ledger
- ✓ Verified accuracy with trial balance
Next, you’ll transform these numbers into the three core financial statements that tell Tech Haven’s complete financial story!
📖 Section 7: Financial Statements - The Complete Picture
Now we transform accounting records into meaningful financial reports.
The Three Core Financial Statements
flowchart TD TB[Trial Balance] --> IS[Income Statement] TB --> BS[Balance Sheet] TB --> CF[Cash Flow Statement] IS -.Net Income.-> BS IS --> D1[Shows:<br/>Profitability] BS --> D2[Shows:<br/>Financial Position] CF --> D3[Shows:<br/>Cash Movement] style TB fill:#0173B2,stroke:#000000,color:#FFFFFF style IS fill:#DE8F05,stroke:#000000,color:#FFFFFF style BS fill:#029E73,stroke:#000000,color:#FFFFFF style CF fill:#CC78BC,stroke:#000000,color:#FFFFFF
Statement 1: Income Statement
Purpose: Shows profitability for a period
Formula:
Tech Haven Computer Repair
Income Statement
For the Month Ended January 31, 2025
REVENUE
Service Revenue $450
Parts Sales Revenue $400
-----
Total Revenue $850
EXPENSES
Rent Expense $800
Wages Expense $600
Utilities Expense $100
Interest Expense $25
Cost of Goods Sold $250
-----
Total Expenses $1,775
-------
NET LOSS ($925)
=======What it tells us:
- Tech Haven lost $925 in month one
- Total revenue: $850
- Total expenses: $1,775
- Common for new businesses with startup costs
Statement 2: Balance Sheet
Purpose: Shows financial position at a point in time
Formula:
Tech Haven Computer Repair
Balance Sheet
January 31, 2025
ASSETS
Current Assets:
Cash $8,825
Inventory $1,750
------
Total Current Assets $10,575
Non-Current Assets:
Equipment $3,000
------
Total Non-Current Assets $3,000
TOTAL ASSETS $13,575
=======
LIABILITIES AND EQUITY
Liabilities:
Bank Loan Payable $5,000
------
Total Liabilities $5,000
Equity:
Owner's Capital $10,000
Owner's Drawings ($500)
Net Income (Loss) ($925)
-------
Total Equity $8,575
TOTAL LIABILITIES AND EQUITY $13,575
=======
Check: $13,575 = $5,000 + $8,575 ✓What it tells us:
- Total assets: $13,575
- Total liabilities: $5,000
- Owner’s equity: $8,575 (reduced by loss and withdrawal)
- Strong liquidity with $10,575 in current assets
Statement 3: Cash Flow Statement
Purpose: Shows how cash moved during the period
Tech Haven Computer Repair
Statement of Cash Flows
For the Month Ended January 31, 2025
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $850
Cash paid to suppliers ($2,000)
Cash paid for rent ($800)
Cash paid for wages ($600)
Cash paid for utilities ($100)
Cash paid for interest ($25)
-------
Net cash used in operations ($2,675)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ($3,000)
-------
Net cash used in investing ($3,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Owner's investment $10,000
Bank loan received $5,000
Owner's withdrawal ($500)
-------
Net cash from financing $14,500
--------
NET INCREASE IN CASH $8,825
CASH AT BEGINNING OF MONTH $0
--------
CASH AT END OF MONTH $8,825
========What it tells us:
- Operations used $2,675 cash (normal for startups)
- Investing used $3,000 (equipment purchase)
- Financing provided $14,500 (owner + loan)
- Ending cash: $8,825 (matches balance sheet)
How Statements Connect
Key connections:
- Income Statement net income → Balance Sheet equity
- Cash Flow Statement ending cash → Balance Sheet cash
- All three tell parts of the same financial story
✓ Checkpoint
What you’ve learned:
- Income statement shows profitability (revenue - expenses)
- Balance sheet shows financial position (assets = liabilities + equity)
- Cash flow statement shows cash movement (operating, investing, financing)
- The three statements interconnect
Practice: If Tech Haven earned $2,000 service revenue next month with same expenses, what would net income be?
Solution
Revenue: $2,000 + $400 (parts) = $2,400
Expenses: $800 + $600 + $100 + $25 + $250 = $1,775
Net Income = $2,400 - $1,775 = $625
The business would be profitable!📖 Section 8: Accounting Principles - The Foundation
Understanding the principles that guide accounting decisions.
1. Accrual Basis vs. Cash Basis
Cash Basis:
- Record revenue when cash received
- Record expenses when cash paid
- Simple but can be misleading
Accrual Basis (standard for businesses):
- Record revenue when earned
- Record expenses when incurred
- Matches revenues and expenses properly
Example: Tech Haven completes $300 repair on Jan 12, customer pays Jan 25.
Cash Basis:
Jan 12: No entry
Jan 25: Cash 300 / Service Revenue 300Accrual Basis:
Jan 12: Accounts Receivable 300 / Service Revenue 300
Jan 25: Cash 300 / Accounts Receivable 300Why accrual is better: Shows true economic activity regardless of cash timing.
2. Matching Principle
Rule: Match expenses to the revenues they helped generate
Example: Tech Haven buys 250 worth in January.
Correct approach:
- Record $2,000 as Inventory (asset)
- When sold, expense only $250 (Cost of Goods Sold)
- Keep remaining $1,750 as inventory
Why it matters: Shows accurate profit for each period.
3. Revenue Recognition Principle
Rule: Recognize revenue when earned, not when cash received
Criteria:
- Service/product delivered
- Amount is measurable
- Collection reasonably certain
4. Going Concern Principle
Rule: Assume business continues operating indefinitely
Impact:
- Value assets at cost, not liquidation value
- Depreciate long-term assets over useful life
5. Consistency Principle
Rule: Use same accounting methods period to period
Why: Allows meaningful comparison between periods.
6. Materiality Principle
Rule: Only account for items that influence decisions
Example: $5 stapler can be expensed immediately rather than treated as long-term asset.
Principles Summary
flowchart TD A[Accrual Basis] --> Q[Quality<br/>Financial<br/>Information] M[Matching] --> Q R[Revenue Recognition] --> Q G[Going Concern] --> Q C[Consistency] --> Q Ma[Materiality] --> Q Q --> D[Better<br/>Decisions] style Q fill:#029E73,stroke:#000000,color:#FFFFFF style D fill:#0173B2,stroke:#000000,color:#FFFFFF
✓ Checkpoint
What you’ve learned:
- Accrual basis matches economic activity
- Matching principle ties expenses to revenues
- Revenue recognized when earned
- Going concern assumes business continues
- Consistency allows period comparisons
- Materiality focuses on what matters
🎯 Practice Challenges
Test your accounting skills with these exercises.
Challenge 1: Basic Journal Entries
Record these transactions:
- Business receives $5,000 loan from bank
- Purchases equipment for $2,000 cash
- Provides service, receives $400 cash
- Pays $300 for supplies
Solutions
1. Cash 5,000
Bank Loan 5,000
2. Equipment 2,000
Cash 2,000
3. Cash 400
Service Revenue 400
4. Supplies Expense 300
Cash 300Challenge 2: Accrual Accounting
Business completes 1,000 in March and $1,000 in April. Record entries for both months.
Solution
March:
Accounts Receivable 2,000
Service Revenue 2,000
Cash 1,000
Accounts Receivable 1,000April:
Cash 1,000
Accounts Receivable 1,000Challenge 3: Financial Statement Preparation
Given these balances, prepare Income Statement and Balance Sheet:
Cash: $15,000
Accounts Receivable: $3,000
Equipment: $10,000
Accounts Payable: $4,000
Owner's Capital: $20,000
Service Revenue: $8,000
Rent Expense: $2,000
Wages Expense: $1,500
Utilities Expense: $500Solution
Income Statement:
Service Revenue $8,000
Less: Expenses
Rent 2,000
Wages 1,500
Utilities 500
Total Expenses ($4,000)
--------
Net Income $4,000
========Balance Sheet:
ASSETS
Cash $15,000
Accounts Receivable $3,000
Equipment $10,000
--------
Total Assets $28,000
========
LIABILITIES
Accounts Payable $4,000
EQUITY
Owner's Capital $20,000
Net Income $4,000
--------
Total Equity $24,000
Total Liabilities + Equity $28,000
========🚀 Next Steps
Congratulations on completing the accounting crash course!
Continue Learning
Deepen Your Knowledge:
- Inventory accounting: FIFO, LIFO, weighted average
- Depreciation methods: Straight-line, declining balance
- Payroll accounting: Taxes, benefits, withholdings
- Adjusting entries: Prepayments, accruals, deferrals
Advanced Topics:
- Managerial accounting (budgeting, cost analysis)
- Financial analysis (ratio analysis, trends)
- Tax accounting (deductions, planning)
Recommended Resources
Books:
- “Accounting Made Simple” by Mike Piper
- “Financial Intelligence for Entrepreneurs” by Karen Berman
- “Accounting All-in-One For Dummies” by Kenneth Boyd
Online Courses:
- Coursera: “Introduction to Financial Accounting”
- LinkedIn Learning: “Accounting Foundations”
- Khan Academy: Free accounting courses
Practice Tools:
- AccountingCoach.com (free lessons and quizzes)
- QuickBooks Online (accounting software)
- Wave (free accounting software)
What You’ve Accomplished
You now understand:
✓ The accounting equation and double-entry bookkeeping ✓ How to record journal entries and post to ledgers ✓ How to prepare and interpret financial statements ✓ Key accounting principles guiding decisions ✓ How to analyze business financial health
This knowledge empowers you to:
- Track finances for any small business
- Understand financial reports
- Make informed business decisions
- Communicate with accountants and investors
Remember
Accounting tells the financial story of a business. Every transaction is part of that story. The better you understand accounting, the better you can read and write that story.
Keep practicing, stay curious, and apply these principles!
Happy accounting! 💰📊