Formulas and Functions for Financial Statements

By John A. Tracy

Part of Accounting Workbook For Dummies Cheat Sheet

As the business manager, you’re in control of your business’s accounting needs, so you need a strong understanding of the ins and outs of financial statements, including what goes on them and in what order. If you don’t prepare them correctly, they won’t reflect a true picture of your business’s financial status. Keep the following important rules and points in mind as you prepare and use your business’s financial statements.

Accounting equation

Assets = Liabilities + Owners’ Equity

Liabilities and owners’ equity are the two basic types of claims on the assets of an entity. The two-sided nature of the accounting equation is the basis for double entry accounting that records both sides of the entity’s transactions — what is received and what is given in the economic exchange.

Rules for debits and credits

Use the following figure for credit and debit basics:


Financial effects of revenues and expenses

Revenue = Asset increase (debit) or Liability decrease (debit)
Expense = Asset decrease (credit) or Liability increase (credit)

Connections between income statement and balance sheet accounts

Sales revenue → Cash and Accounts receivable

Cost of goods sold expense ← Inventory

Operating expenses → Cash

Operating expenses ← Prepaid expenses

Operating expenses → Accounts payable

Operating expenses → Accrued expenses payable

Depreciation expense ← Fixed assets

Interest expense → Accrued expenses payable

Income tax expense → Accrued expenses payable

Bookkeeping cycle

Transactions (and certain other events) → Original Entries in Journals → Postings in General Ledger Chart of Accounts → End-of-Period Adjusting Entries → Preparation of Financial Statements, Tax Returns, and Internal Accounting Reports → Closing Entries at End of Year