Financial Accounting — Cheatsheets
The accounting equation
Assets = Liabilities + Capital
Debit/credit rules by account type
|---|---|---|
| Assets | Increase | Decrease |
|---|
| Liabilities | Decrease | Increase |
| Capital | Decrease | Increase |
| Expenses | Increase | Decrease |
| Income/Revenue | Decrease | Increase |
Accounting cycle stages
|---|---|
| Journal entry | Initial chronological record of a transaction |
|---|
| Ledger posting | Organizing entries by individual account |
| Trial balance | Verifying total debits = total credits |
| Adjustments | Applying accrual principle (outstanding/prepaid/accrued items, depreciation) |
| Final accounts | Trading Account, P&L Account, Balance Sheet |
| Ratio analysis | Interpreting final accounts for performance insight |
Trial balance error types not caught by balancing
|---|---|
| Omission | Transaction not recorded at all |
|---|
| Commission | Recorded in wrong account, correct amount |
| Compensating | Two errors cancel out numerically |
Final accounts quick reference
|---|---|---|
| Trading Account | Gross profit | Net Sales − Cost of Goods Sold |
|---|
| Profit and Loss Account | Net profit | Gross Profit − Operating Expenses + Other Income |
| Balance Sheet | Financial position (point in time) | Assets = Liabilities + Capital |
Key ratio formulas
|---|---|---|
| Gross Profit Ratio | Gross Profit / Net Sales × 100 | Core trading profitability |
|---|
| Net Profit Ratio | Net Profit / Net Sales × 100 | Overall profitability |
| Current Ratio | Current Assets / Current Liabilities | Short-term liquidity |
| Debt-to-Equity Ratio | Total Debt / Total Equity | Long-term solvency/leverage |
Rule of thumb: ratios are meaningful only in comparison — against prior periods, industry benchmarks, or specific targets — not as isolated numbers.
Adjustment types (accrual principle)
|---|---|
| Outstanding expense | Incurred but not yet paid — still recorded as period expense |
|---|
| Prepaid expense | Paid in advance — not fully expensed in current period |
| Accrued income | Earned but not yet received |
| Depreciation | Systematic allocation of fixed-asset cost over useful life |
