Accounting Workbook For Dummies (UK Edition)
Need useful and concise tips and rules for accounting in the UK? Look no further. This Cheat Sheet is packed with handy, at-a-glance essential equations, flow charts and reminders to help make balancing the books a breeze.
Explaining Accounting Equations
Accounting equations can be tricky to remember, so this handy reference gives you everything you need to do your sums easily and, more importantly, correctly.
Understanding liabilities and 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’s received and what’s given in the economic exchange.
Assets = Liabilities + Owners’ Equity
Knowing the rules for debits and credits
Here is your handy, at-a-glance table to help you remember the rules for debits and credits in accounting. Keep it by your calculator and never get confused again!
Financial effects of revenues and expenses
As you work your way through your accounting sums, remember the following simple accounting rule when it comes to calculating the financial effects of revenues and expenses:
Revenue = Asset increase (debit) or Liability decrease (debit)
Expense = Asset decrease (credit) or Liability increase (credit)
Connections between Profit & Loss Statement and Balance Sheet Accounts
We make remembering accounting rules and connections easy. The following list shows the connections between the Profit & Loss Statement and the balance sheet accounts.
Sales revenue > Cash and Debtors
Cost of goods sold expense < Stock
Operating expenses > Cash
Operating expenses < Prepaid expenses
Operating expenses > Creditors
Operating expenses > Accrued expenses payable
Depreciation expense < Fixed assets
Interest expense > Accrued expenses payable
Income tax expense > Accrued expenses payable
When you’re doing your accounts, you need to do things in a certain order. Keep track of the bookkeeping cycle with the following useful flow chart:
Transactions (and certain other events) > Original Entries in Journals > Postings in Nominal (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
Adjustments to Net Income for Determining Cash Flow from Operating Activities
Debtors, stock and prepaid expenses are operating assets used in the profit making process. Creditors and accrued expenses payable are operating liabilities used in the profit making process.
Operating asset increases and operating liability decreases are negative adjustments (decrease cash flow from operating activities)
Operating asset decreases and operating liability increases are positive adjustments (increase cash flow from operating activities)
Depreciation and amortisation expenses are positive adjustments (increase cash flow from operating activities)
Cardinal Rule: Make all cash flow adjustments to net income; don’t simply add back depreciation and amortisation, which could be seriously misleading to your auditors.