SIGNAL & RUNWAY
Financial Accounting Core Pack
Double-entry, the three statements, adjusting entries, depreciation, and the ratios exams actually test - with 10
practice questions and a full answer key.
Study pack · September 2026 · aligned to standard introductory financial accounting courses
Original study material by Signal & Runway. Framework-agnostic: where IFRS and US GAAP differ, the difference is flagged.
1. The accounting equation and double-entry
Everything in financial accounting hangs on one identity:
Assets = Liabilities + Equity
Equity = contributed capital + retained earnings (accumulated profit not yet distributed). Every transaction keeps this
equation in balance.
Double-entry records every transaction in at least two accounts, as debits (Dr) and credits (Cr) of equal total. Debit means "left
side", credit means "right side" - nothing more mystical than that.
Account type Increases with Decreases with Normal balance
Assets (cash, receivables, inventory, equipment) Debit Credit Debit
Expenses Debit Credit Debit
Liabilities (payables, loans, unearned revenue) Credit Debit Credit
Equity (share capital, retained earnings) Credit Debit Credit
Revenue Credit Debit Credit
Memory hook: DEAD - Debits increase Expenses, Assets, Dividends (drawings). Everything else increases with credits.
Worked example
A company buys equipment for 10,000 cash. Dr Equipment (asset up) 10,000; Cr Cash (asset down) 10,000. Equation stays
balanced: one asset up, another down. If bought on credit instead: Dr Equipment 10,000; Cr Accounts payable (liability up) 10,000.
2. The three statements and how they link
Statement Question it answers Core content
Income statement (P&L) Did we earn more than we spent, over a period? Revenue - expenses = net income (accrual basis)
Balance sheet What do we own and owe, at one date? Assets = liabilities + equity, at period end
Cash flow statement Where did cash actually move? Operating + investing + financing = change in cash
The links (exam favorite)
Net income flows into equity: closing retained earnings = opening retained earnings + net income - dividends.
The cash flow statement reconciles to the balance sheet: opening cash + net cash flow = closing cash (the balance
sheet cash line).
Depreciation appears in all three: an expense on the income statement, reduces asset book value on the balance sheet,
and is added back in operating cash flow (it is non-cash).
Profit is not cash: a sale on credit raises revenue and receivables, not cash. The cash flow statement converts accrual
profit back to cash movements.
Indirect operating cash flow, the standard build: start with net income, add back non-cash charges (depreciation,
amortization, impairments), remove non-operating gains/losses, then adjust for changes in working capital: receivables up =
subtract; inventory up = subtract; payables up = add.
, 3. Accruals and adjusting entries
Accrual accounting records revenue when earned and expenses when incurred, not when cash moves. Period-end adjusting entries
force the books onto that basis. Four families:
Type Situation Adjusting entry
Prepaid expense Paid 12,000 rent in advance for 12 months; 3 months used Dr Rent expense 3,000; Cr Prepaid rent 3,000
Unearned Received 6,000 for a 6-month service contract; 2 months Dr Unearned revenue 2,000; Cr Service revenue
revenue delivered 2,000
Accrued expense Salaries of 5,000 earned by staff, paid next period Dr Salaries expense 5,000; Cr Salaries payable
5,000
Accrued revenue Interest of 800 earned, not yet received Dr Interest receivable 800; Cr Interest revenue 800
Pattern to memorize: prepayments and unearned revenue start as balance-sheet items and move into the P&L over time;
accruals start in the P&L and create balance-sheet items.
4. Depreciation
Depreciation allocates the cost of a tangible asset over its useful life. Depreciable amount = cost - residual (salvage) value.
Method Formula (per year) Pattern
Straight-line (Cost - residual) / useful life Equal charge every year
Declining balance (e.g. double) Book value x (2 / useful life); no residual in the rate, but stop at residual Front-loaded, falls over time
Units of production (Cost - residual) x units this year / total expected units Follows usage
Worked example
Machine cost 50,000, residual 5,000, life 5 years. Straight-line: (50,000 - 5,000) / 5 = 9,000 per year. Double-declining: year 1 =
50,000 x 40% = 20,000; year 2 = 30,000 x 40% = 12,000. Accumulated depreciation is a contra-asset: the balance sheet shows
cost minus accumulated depreciation = carrying (book) value.
Flag: IFRS (IAS 16) and US GAAP both allow the methods above; IFRS additionally permits revaluation of fixed assets, US GAAP does not. Component
depreciation is required under IFRS, permitted under US GAAP.
Financial Accounting Core Pack
Double-entry, the three statements, adjusting entries, depreciation, and the ratios exams actually test - with 10
practice questions and a full answer key.
Study pack · September 2026 · aligned to standard introductory financial accounting courses
Original study material by Signal & Runway. Framework-agnostic: where IFRS and US GAAP differ, the difference is flagged.
1. The accounting equation and double-entry
Everything in financial accounting hangs on one identity:
Assets = Liabilities + Equity
Equity = contributed capital + retained earnings (accumulated profit not yet distributed). Every transaction keeps this
equation in balance.
Double-entry records every transaction in at least two accounts, as debits (Dr) and credits (Cr) of equal total. Debit means "left
side", credit means "right side" - nothing more mystical than that.
Account type Increases with Decreases with Normal balance
Assets (cash, receivables, inventory, equipment) Debit Credit Debit
Expenses Debit Credit Debit
Liabilities (payables, loans, unearned revenue) Credit Debit Credit
Equity (share capital, retained earnings) Credit Debit Credit
Revenue Credit Debit Credit
Memory hook: DEAD - Debits increase Expenses, Assets, Dividends (drawings). Everything else increases with credits.
Worked example
A company buys equipment for 10,000 cash. Dr Equipment (asset up) 10,000; Cr Cash (asset down) 10,000. Equation stays
balanced: one asset up, another down. If bought on credit instead: Dr Equipment 10,000; Cr Accounts payable (liability up) 10,000.
2. The three statements and how they link
Statement Question it answers Core content
Income statement (P&L) Did we earn more than we spent, over a period? Revenue - expenses = net income (accrual basis)
Balance sheet What do we own and owe, at one date? Assets = liabilities + equity, at period end
Cash flow statement Where did cash actually move? Operating + investing + financing = change in cash
The links (exam favorite)
Net income flows into equity: closing retained earnings = opening retained earnings + net income - dividends.
The cash flow statement reconciles to the balance sheet: opening cash + net cash flow = closing cash (the balance
sheet cash line).
Depreciation appears in all three: an expense on the income statement, reduces asset book value on the balance sheet,
and is added back in operating cash flow (it is non-cash).
Profit is not cash: a sale on credit raises revenue and receivables, not cash. The cash flow statement converts accrual
profit back to cash movements.
Indirect operating cash flow, the standard build: start with net income, add back non-cash charges (depreciation,
amortization, impairments), remove non-operating gains/losses, then adjust for changes in working capital: receivables up =
subtract; inventory up = subtract; payables up = add.
, 3. Accruals and adjusting entries
Accrual accounting records revenue when earned and expenses when incurred, not when cash moves. Period-end adjusting entries
force the books onto that basis. Four families:
Type Situation Adjusting entry
Prepaid expense Paid 12,000 rent in advance for 12 months; 3 months used Dr Rent expense 3,000; Cr Prepaid rent 3,000
Unearned Received 6,000 for a 6-month service contract; 2 months Dr Unearned revenue 2,000; Cr Service revenue
revenue delivered 2,000
Accrued expense Salaries of 5,000 earned by staff, paid next period Dr Salaries expense 5,000; Cr Salaries payable
5,000
Accrued revenue Interest of 800 earned, not yet received Dr Interest receivable 800; Cr Interest revenue 800
Pattern to memorize: prepayments and unearned revenue start as balance-sheet items and move into the P&L over time;
accruals start in the P&L and create balance-sheet items.
4. Depreciation
Depreciation allocates the cost of a tangible asset over its useful life. Depreciable amount = cost - residual (salvage) value.
Method Formula (per year) Pattern
Straight-line (Cost - residual) / useful life Equal charge every year
Declining balance (e.g. double) Book value x (2 / useful life); no residual in the rate, but stop at residual Front-loaded, falls over time
Units of production (Cost - residual) x units this year / total expected units Follows usage
Worked example
Machine cost 50,000, residual 5,000, life 5 years. Straight-line: (50,000 - 5,000) / 5 = 9,000 per year. Double-declining: year 1 =
50,000 x 40% = 20,000; year 2 = 30,000 x 40% = 12,000. Accumulated depreciation is a contra-asset: the balance sheet shows
cost minus accumulated depreciation = carrying (book) value.
Flag: IFRS (IAS 16) and US GAAP both allow the methods above; IFRS additionally permits revaluation of fixed assets, US GAAP does not. Component
depreciation is required under IFRS, permitted under US GAAP.
