Accounting Principles and Formulas
Accounting Principles and Formulas
Basic Accounting Equation - ANS-Assets = Liabilities + Owner's Equity
Business Entity - ANS-The financial statements report about a single business. Every
business gets its own set of books. Accountants do not mix in the owner's personal
financial information.
Current - ANS-"Current" liabilities are those debts that must be paid within one year or
one operating cycle, whichever is longer.
Current Ratio - ANS-Current Assets/Current Liabilities = Current Ratio
Debt Ratio - ANS-Total Liabilities/Total Assets = Debt Ratio
Alternate Debt Ratio - ANS-100% - Equity Ratio = Debt Ratio
Double Entry Accounting - ANS-Recording business transactions twice: once to show
where the money came from, and another time to show where the money went.
Equity Ratio - ANS-Total Equity/Total Assets = Equity Ratio
Alternate Equity Ratio - ANS-100% - Debt Ratio = Equity Ratio
Liability Account - ANS-Payable or Deferred
Equity Account - ANS-Owner's name, Withdrawal, Dividend, Stock.
Income Account - ANS-Sales, Income, or Revenue
Expense Account - ANS-Expense (every expense account should be marked with
"exp." at the end)
Asset Account - ANS-Receivable, Prepaid, Investment, Inventory (many asset accounts
merely have the name of the asset without any special identifying word)
Book value of a long-lived asset - ANS-Purchase Price - Accumulated Depreciation =
Book Value
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, Accounting Principles and Formulas
Ending owner's equity formula - ANS-Equity (beginning) + Net Income - Withdrawal =
Equity (ending)
Gross Profit (GP) - ANS-Sales - CGS = GP
Income Statement Formula - ANS-Sales - CGS = GP
GP - Expenses = Net Income
Cash flow statement formula - ANS-Cash from operations
+ Cash from investment activities
+ Cash from financing activities
= Total change in cash
+ Cash - beginning of period
= Cash - end of period.
Conservative Principle - ANS-The accounting principle that requires accountants to
resolve financial statement uncertainty in the least favorable way.
Going-Concern Principle - ANS-The accounting principle that requires that financial
statements be based on the assumption that the business will last indefinitely.
Historical Cost Principle - ANS-The accounting principle that requires assets to be
reported on balance sheets at their historical cost.
Objectivity Principle - ANS-The accounting principles that requires business
transactions to be recorded using the best objective evidence.
Stable Monetary Unit Principle - ANS-The accounting principle that assumes that the
value of money stays the same year after year.
Debit and credit formulas - ANS-Debits = Credits. Always.
Materiality Principle - ANS-The accounting principle that says that businesses should
pay for more accurate information only if the information is useful for making business
decisions.
Matching Principle - ANS-The company's income and expenses associated with that
income should be matched with each other and reported in the same period.
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Accounting Principles and Formulas
Basic Accounting Equation - ANS-Assets = Liabilities + Owner's Equity
Business Entity - ANS-The financial statements report about a single business. Every
business gets its own set of books. Accountants do not mix in the owner's personal
financial information.
Current - ANS-"Current" liabilities are those debts that must be paid within one year or
one operating cycle, whichever is longer.
Current Ratio - ANS-Current Assets/Current Liabilities = Current Ratio
Debt Ratio - ANS-Total Liabilities/Total Assets = Debt Ratio
Alternate Debt Ratio - ANS-100% - Equity Ratio = Debt Ratio
Double Entry Accounting - ANS-Recording business transactions twice: once to show
where the money came from, and another time to show where the money went.
Equity Ratio - ANS-Total Equity/Total Assets = Equity Ratio
Alternate Equity Ratio - ANS-100% - Debt Ratio = Equity Ratio
Liability Account - ANS-Payable or Deferred
Equity Account - ANS-Owner's name, Withdrawal, Dividend, Stock.
Income Account - ANS-Sales, Income, or Revenue
Expense Account - ANS-Expense (every expense account should be marked with
"exp." at the end)
Asset Account - ANS-Receivable, Prepaid, Investment, Inventory (many asset accounts
merely have the name of the asset without any special identifying word)
Book value of a long-lived asset - ANS-Purchase Price - Accumulated Depreciation =
Book Value
Page 1
, Accounting Principles and Formulas
Ending owner's equity formula - ANS-Equity (beginning) + Net Income - Withdrawal =
Equity (ending)
Gross Profit (GP) - ANS-Sales - CGS = GP
Income Statement Formula - ANS-Sales - CGS = GP
GP - Expenses = Net Income
Cash flow statement formula - ANS-Cash from operations
+ Cash from investment activities
+ Cash from financing activities
= Total change in cash
+ Cash - beginning of period
= Cash - end of period.
Conservative Principle - ANS-The accounting principle that requires accountants to
resolve financial statement uncertainty in the least favorable way.
Going-Concern Principle - ANS-The accounting principle that requires that financial
statements be based on the assumption that the business will last indefinitely.
Historical Cost Principle - ANS-The accounting principle that requires assets to be
reported on balance sheets at their historical cost.
Objectivity Principle - ANS-The accounting principles that requires business
transactions to be recorded using the best objective evidence.
Stable Monetary Unit Principle - ANS-The accounting principle that assumes that the
value of money stays the same year after year.
Debit and credit formulas - ANS-Debits = Credits. Always.
Materiality Principle - ANS-The accounting principle that says that businesses should
pay for more accurate information only if the information is useful for making business
decisions.
Matching Principle - ANS-The company's income and expenses associated with that
income should be matched with each other and reported in the same period.
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