Accounting Tips and Tricks

For all those of you who can't tell your debits from your credits, or otherwise have difficulty with accounting, hopefully this post will be able to help you out.

We'll start with the basics, at the very beginning. Debits are placed in the left column; credits in the right. The three main classifications for accounting are Assets, Liabilities, and Stockholder's Equity, which all must be in balance in the Accounting Equation, where Assets (A) = Liabilities (L) + Stockholder's Equity (SE). Stockholder's Equity can also be referred to as Owner's Equity (OE); generally the difference is referring to the type of company: corporation or sole proprietorship. 

Debits increase regular assets; decrease regular liabilities; and decrease regular stockholder's equity. However, there are some times where this is not the case; for example, depreciation is a contra-asset account, meaning it belongs with the assets, but it is decreasing, or against, the assets, so debiting the account actually decreases it. Same with Stockholder's Equity accounts—any and all expenses are debited to increase them, credited to decrease. Moreover, Stockholder's Equity accounts can get much more confusing—there are actually contra-revenue accounts, such as Sales Returns, allowing for any returns customers may make.

The next topic one generally learns about are journal entries; every entry must have at least one debit and one credit, although it could have more of one or both, as long as the two columns end up being equal. Although eventually one will get to use software that will do most of the heavy lifting, one usually starts out learning the whys and wherefores of the subject, so for the first step, one would "take the day's receipts" and "journalize" them. This basically means transferring the sales, cash, receivables, or other accounts dealt with by the company from the receipts or notes and officially adding them, as an entry, to the general journal. Once that is complete, one will take the individual accounts, and post them to their specific "T-account" in the general ledger; in addition, one will often put the general journal page number next to the transaction entry in the t-account, and the account number from the general ledger next to the account entry in the general journal. From there, the financial statements will be prepared at the end of the period.

There are four main financial statements with which accountants should be familiar: the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows. There are other financials which are not as important, and some other names by which these may be known, but these are the most useful. These financials are all interrelated, and they flow through onto one another when one is preparing them. The income statement presents how much income (or loss) was made by the company after expenses are deducted from revenues; the statement of retained earnings, a measurement of the change of equity, starts with the beginning retained earnings, which are monies kept within the company, and adds net income (or deducts net loss) and deducts dividends to arrive at ending retained earnings; the balance sheet is considered a snapshot of a point in time of the company's assets, liabilities, and stockholder's equity (which is where retained earnings flows through); and the statement of cash flows attempts to give a depiction of the cash receipts and disbursements made by a company, and why the company's ending cash balance is what it is.

Of these statements, the income statement, the statement of retained earnings, and the statement of cash flows are presented at the end of a period of time, often the end of the month, quarter, or fiscal year. The reason for this is that they represent a change in the value of an account or of the way in which the value of an account was generated. The balance sheet shows the balances of the main accounts on the books of the company on a specific date, usually the end of the period, whether that be month, quarter, or year, but it does not show the change over time.

Another important distinction which must be drawn is that a company may have different calculations for different accounts depending on the parties to whom the information is being presented. The company might have one number on their own books, another number for investors and the general public, and yet another value for the IRS. Yes, a company's "books" and "tax" information are very different most of the time, as the IRS asks for, and, indeed, requires, one set of calculations made under strict guidelines, while the Financial Accounting Standards Board (FASB) has another very specific set of Generally Accepted Accounting Principles (GAAP) for the public. As if that isn't enough, certain parts of the statements are different if presented internationally, as instructed by the International Accounting Standards Board (IASB) and their rules, International Financial Reporting Standards (IFRS). However, one generally does not have to learn about all this in the same class.

One website that looks as though it could be quite helpful to struggling accounting students—Accounting Coach. Although some features of the site are only available to paying customers, I believe that mainly the necessary accounting information is free, and additional helps may be what actually would cost you.