SMARTLY

ACCOUNTING FUNDAMENTALS

THE PRACTICE OF ACCOUNTING

Account Types

T-accounts are charts used to record increases and decreases of Asset

individual accounts found on the balance sheet.
Debit Credit
Debits represent an increase in an asset but a decrease in a = =
liability or equity. Increase Decrease
Credits represent a decrease in an asset but an increase in a
liabilty or equity.
Liability or Equity
• Asset accounts will normally have debit balances.
Debit Credit
• Liability & Equity accounts will normally have credit = =
balances. Decrease Increase

Revenues and Expenses are temporary accounts.

• Revenues are increases in equity and usually have a credit

balance.
• Expenses are decreases in equity and usually have a debit
balance.
• Revenues are debited and credited like equity accounts,
but Expenses are debited and credited like asset accounts.

General Asset General Liability General Equity

Account Account Account

+ - - + - +

Expenses Revenues

+ - - +

Left side: Debit Right side: Credit

Increase: Increase:
Assets Expenses Liabilities Equity
Revenues

Decrease: Decrease:
Liabilities Equity Assets
Revenue Expenses

©2018 Pedago, LLC. All rights reserved.

ACCOUNTING FUNDAMENTALS SMARTLY

Accounting Transactions

Income Statements are used to calculate net income. Pete’s Pizza Income Statement
Year Ended 12/31/14
Net income: The difference between total revenues and total ($ in 000’s)
expenses. It’s calculated as follows: Revenue $ 2,000
Cost of Goods Sold 1,400
Gross Profit $ 600
Net Income = Total Revenues — Total Expenses SG&A 300
Operating Profit (EBIT) $ 300
Balance Sheets record one point in history and show a company’s Interest Expense 40
financial position. Taxes 104
Net Income $ 156
Income Statements measure a company’s financial performance
over a period of time.
The Wallace Cinema • Journal
General Journal: The chronological record of every transaction. A 2014 Accounts Dr. Cr
journal entry uses the same rules as a T-account. Apr. 1 Cash
Paid-in Capital
✓
✓
20,00
0 20,00
0

General Ledger: The collection of all T-accounts. 2 Cash

Notes Payable
✓
✓
10,00
0 10,00
0
3 Cash ✓ 50

• Revenues and Expenses are temporary accounts. At the Revenues ✓ 0 50

0

end of a period, they are closed out and their balances are 3 Expenses
Inventory
✓
✓
300
300

transferred to the income statement. 7 Accounts Receivable ✓ 80

Revenues ✓ 0 80
0
• Other asset, liability, and equity accounts are permanent 7 Expenses
Inventory
✓
✓
400
400
accounts. They are not closed out, and their balances are
transferred to the balance sheet.

The Wallace Cinema • General Ledger

CASH ACCOUNTS PAYABLE REVENUES
1,750 750
750 500 500
200
200 1,000
1,500 800
800
1,750 500 1,750 1,750

1,250 0

INVENTORY RETAINED EARNINGS EXPENSES

500 50 1,075 50 675
500 125 125
1,000 500 500
2,000 675 675 675
1,325 0

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