Appendix

A Review of Accounting
Principles
Appendix A is a review of basic accounting principles and procedures. Standard
accounting procedures are based on the double-entry system. This means that
each business transaction is expressed with one or more debits and one or more
credits in a journal entry and then posted to the ledger. The debits in each
transaction must equal the credits.
The double-entry accounting system is based on the following premise: each
account has two sides–a debit (left) side and credit (right) side. This is stated in
the accounting equation as:

Assets = Liabilities + Equities

Assets are the organization’s resources that have a future or potential value.
Asset accounts include: Cash, Accounts Receivable, Office Supplies, Prepaids,
Inventory, Investments, Equipment, Land, Buildings, etc.

Liabilities are the organization’s responsibilities to others. Liability accounts

include: Accounts Payable, Notes Payable, Unearned Rent, etc.

Equities are the difference between the organization’s assets and liabilities.
Equity accounts for organizations that are sole proprietorships or partnerships
include: Capital and Withdrawals. Equity accounts for organizations that are
corporations include contributed capital accounts like Common Stock which
represent external ownership and Retained Earnings which represent internal
ownership interests. Temporary equity-related accounts known as revenue and
expense accounts recognize an organization’s income producing activities and
the related costs consumed or expired during the period.

Since assets are on the left side of the accounting equation, the left side of the
account increases. This is the usual balance, too; assets increase on the left side
and have a debit balance. Liabilities and Equities accounts are on the right side
of the equation. Therefore, they increase on the right side and normally carry
credit balances.

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149
150 Appendix A: Review of Accounting Principles

Another way to show the accounting equation and double-entry is illustrated

below.
ASSETS
+ -

LIABILITIES
- +

EQUITIES
- +

EXPENSES REVENUES
+ - - +

Each element of the accounting equation, Assets, Liabilities, and Equities,

behaves similarly to their placement in the equation. Assets have debit balances;
Liabilities have credit balances; Equities have credit balances; Expenses have
debit balances because they decrease equity; and Revenues have credit
balances because they increase equity.

In computerized accounting it is important to organize each account according to

a system. This is called the Chart of Accounts. The Chart of Accounts is a listing
of all the general ledger accounts. The QuickBooks Online Essentials Edition’s
chart of accounts shows the account name, Type (this classifies the accounts for
financial statements) and Balance total. To view the chart of accounts: go to the
QuickBooks Online Essentials Edition’s Company drop-down menu and click on
the Chart of Accounts. The Your Name Service Corporation partial chart of
account is shown on the next page as an example of a typical service business’
chart of accounts.

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 Appendix A: Review of Accounting Principles 151

Report information in the form of financial statements is important to accounting.

The Balance Sheet reports the financial position of the business on a specific
date. It shows that assets are equal to liabilities Essentials equities—the
accounting equation. The Profit & Loss shows the difference between revenue
and expenses for a specified period of time (month, quarter, or year). The
Income Statement is another name for Profit & Loss. QuickBooks tracks revenue
and expense data for an entire year. At the end of the year when all revenue and
expense accounts are closed, the resulting net income or loss is moved into the
equity account, Retained Earnings. The Statement of Cash Flows reports the
operating, financial, and investing activities for the period. It shows the sources
of cash coming into the business and the destination of the cash going out.

The most important task you have is accurately recording transactions into the
appropriate accounts. QuickBooks Online Essentials Edition helps you by
organizing the software into tabs and pulldown menus. By selecting the
appropriate tab and/or pulldown menu, you can record transactions into the right
place using easy-to-complete forms. Once transactions are entered, QuickBooks
keeps this information in an online database. Then the data can then be
accessed and viewed as journal entries or transaction listings, account or ledger
activities, reports, or analysis.

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152 Appendix A: Review of Accounting Principles

One of the most important tasks is deciding how to enter transactions. Recording
and categorizing business transactions will determine how QuickBooks uses that
information. For instance, observe that the chart of accounts shows Account
Your Name Corporation-Cash, classified as a Bank Type; Account Accounts
Receivable is Accounts Receivable. The Type column classifies the account for
the financial statements—Asset, Liability, and Equity accounts go on the Balance
Sheet; Income, Cost of Goods Sold, and Expense accounts go on the Profit &
Loss Statement.

As you work with QuickBooks, you see how the accounts, recording of
transactions, and reports work together to provide your business with the
information necessary for making informed decisions.

Another important aspect of accounting is determining whether the basis for

recording transactions is cash or accrual. In the cash basis method, revenues
and expenses are recognized when cash changes hands. In other words, when
the customer pays for their purchase, the transaction is recorded. When the
resource or expense is paid for by the business, the transaction is recorded.

In the accrual method of accounting, revenues and expenses are recognized

when they occur. In other words, if the retail business purchases inventory on
April 1, the transaction is recorded on April 1. If inventory is sold on account on
April 15, the transaction is done on April 15 not when cash is received from
customers. Accrual basis accounting is seen as more accurate because assets,
liabilities, revenues, and expenses are recorded when they actually happen.

The chart on the next page summarizes Appendix A, Review of Accounting

Principles.

Accounting Fundamentals with QuickBooks Online Essentials Edition

 ACCOUNTING
EQUATION: Assets = Liabilities + Owners Equities + Revenues – Expenses

Definition: Something that has future Responsibilities to others Internal and External Recognition of value Expired, used, or
or potential value “Payables” ownership creation consumed costs or
“resources” “Unearned” resources
Debit Rules: DR Increase Decrease Decrease Decrease Increase
Credit Rules:CR Decrease Increase Increase Increase Decrease
Current Assets: Current Liabilities: Sole Proprietor: (both Operating Revenue: Product/Services
Cash, Marketable Accounts Payable, internal and external) Sales: Fees Earned, Expenses:
Securities, Accounts Unearned Revenue, Name, Capital; Rent Income, Cost of Goods Sold,
Receivable, Inventory, Advances from Customer Name, Withdrawals Contract Revenue Cost of Sales
Account Types Prepaids
and Examples Noncurrent or Long- Partnership: (both internal Other Revenue: Operating Expenses:
Plant Assets: term Liabilities: and external) Interest Income Selling Expenses,
Land, Buildings, Bonds Payable, Notes Partner A, Capital; Administrative Expense,
Equipment, Payables, Mortgage Partner A, Withdrawals, etc. General Expense,
Accumulated Depreciation Payable Salary Expense,
Corporation: Rent Expense,
Noncurrent Assets: External: Common Stock, Depreciation Expense,
Investments, Preferred Stock, Paid-in Insurance Expense
Intangibles Capital
Internal: Retained Earnings, Other Expenses:
Dividends Interest Expense

Assets Liabilities Owners Equities Revenues Expenses

Acquire Consume Pay bills Buy on Internal: Internal: Sales Sales Resources
resources resources Recognize credit Net Loss Net returns Earned consumed
T-Account earnings Receive External: Income Sales Income expired
Rules cash Owners External: discount used
or other reduce Investment given
assets ownership made by
before thru owners in
earning it withdrawals company
or dividends

increase decrease decrease decrease increase decrease increase Increase decrease

increase

Accounting Fundamentals with QuickBooks Online Essentials Edition 153

 Income Statement
Balance Sheet
Revenue-Expense=Net Income (NI) or Loss
Assets=Liabilities + Equities
(NL)
(Prepare third)
(Prepare first)
Basic
Financial
Statement of Equity
Statements:
Statement of Cash Flows Beginning* + NI (or –NL) - (Dividends or Withdrawals) = Ending*
Operating+/-Investing+/-Financing+Beginning Cash=Ending Cash *for Sole Proprietors and Partnerships use "Capital” and Withdrawals
(Prepare last) for Corporations use "Retained Earnings" and Dividends
(Prepare second)

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