Essential Accounting Basics: A Complete Cheatsheet

Introduction

Accounting is the language of business—a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information. It reveals an organization’s financial health, profitability, and cash flows, providing critical insights for decision-making. Whether you’re a business owner, student, or professional in another field, understanding accounting fundamentals is essential for making informed financial decisions and interpreting business performance.

Core Accounting Principles

The Accounting Equation

Assets = Liabilities + Equity

This fundamental equation forms the basis of all accounting systems and must always remain in balance.

Double-Entry Accounting System

Every financial transaction affects at least two accounts and must maintain the accounting equation balance.

Key principles:

• Each transaction has equal and opposite effects
• For every debit entry, there must be a corresponding credit entry
• Total debits must always equal total credits

GAAP & IFRS: Accounting Standards

Shared Core Principles:

• Consistency: Similar transactions handled in the same manner
• Going Concern: Business will continue to operate indefinitely
• Accrual Basis: Transactions recorded when they occur, not when cash exchanges hands
• Materiality: Information is material if its omission could influence decisions
• Conservatism: When uncertain, choose the option less likely to overstate assets/income

The Accounting Cycle

Core Financial Statements

1. Balance Sheet (Statement of Financial Position)

Shows the company’s financial position at a specific point in time.

Structure:

Assets = Liabilities + Equity

Assets:
- Current Assets (cash, inventory, accounts receivable)
- Non-Current Assets (property, equipment, intangibles)

Liabilities:
- Current Liabilities (accounts payable, short-term debt)
- Non-Current Liabilities (long-term debt, deferred tax)

Equity:
- Contributed Capital (investments from owners)
- Retained Earnings (accumulated profits not distributed)

2. Income Statement (Profit & Loss Statement)

Shows the company’s financial performance over a period of time.

Structure:

Revenue - Expenses = Net Income/Loss

- Revenue (sales, service fees, interest income)
- Cost of Goods Sold (direct costs of products sold)
= Gross Profit
- Operating Expenses (salaries, rent, utilities)
= Operating Income
+/- Other Income/Expenses (interest expense, investment income)
= Income Before Taxes
- Income Tax Expense
= Net Income

3. Cash Flow Statement

Shows how cash and cash equivalents changed during a period.

Structure:

Operating Activities:
- Net Income
+/- Adjustments (depreciation, changes in working capital)
= Net Cash from Operating Activities

Investing Activities:
- Purchase/Sale of long-term assets
- Investments made or sold
= Net Cash from Investing Activities

Financing Activities:
- Debt obtained or repaid
- Dividends paid
- Stock issued or repurchased
= Net Cash from Financing Activities

Net Increase/Decrease in Cash
+ Beginning Cash Balance
= Ending Cash Balance

4. Statement of Changes in Equity

Shows changes in the company’s equity during a period.

Structure:

Beginning Equity Balance
+ Net Income
- Dividends
+/- Other Equity Transactions (stock issuance/repurchase)
= Ending Equity Balance

Key Accounting Concepts & Terminology

Account Types

Accounting Methods

Inventory Valuation Methods

Depreciation Methods

Common Financial Ratios

Liquidity Ratios

Measure a company’s ability to pay short-term obligations.

Profitability Ratios

Measure a company’s ability to generate earnings relative to sales, assets, and equity.

Activity Ratios

Measure how efficiently a company uses its assets.

Solvency Ratios

Measure a company’s ability to meet long-term obligations.

Common Accounting Challenges & Solutions

Challenge: Revenue Recognition

Solution:

• Identify the contract and performance obligations
• Determine the transaction price
• Allocate the price to performance obligations
• Recognize revenue when obligations are satisfied

Challenge: Accruals & Deferrals

Solution:

• Record expenses when incurred, not when paid (accrual)
• Record revenues when earned, not when received (accrual)
• Defer expenses paid in advance (prepaid expenses)
• Defer revenues received in advance (unearned revenue)

Challenge: Fixed Asset Management

Solution:

• Develop capitalization thresholds
• Implement a fixed asset tracking system
• Document depreciation policies
• Perform regular physical inventories
• Reconcile fixed asset accounts regularly

Challenge: Month-End Close Process

Solution:

• Create a standardized closing checklist
• Establish timeline with clear responsibilities
• Automate recurring journal entries
• Prepare account reconciliations
• Review variances against budget/forecast

Challenge: Internal Controls

Solution:

• Segregate duties (authorization, recording, custody)
• Implement approval hierarchies
• Document procedures
• Perform regular audits and reviews
• Maintain audit trails for transactions

Best Practices & Practical Tips

1. Documentation: Maintain clear records of all transactions with supporting documentation
2. Consistency: Apply accounting policies consistently across periods
3. Reconciliation: Regularly reconcile accounts, especially cash accounts
4. Automation: Use accounting software to reduce errors and improve efficiency
5. Backup: Maintain secure backups of all accounting data
6. Audit Trail: Ensure all transactions can be traced from source to financial statements
7. Chart of Accounts: Design a logical, consistent chart of accounts adapted to your business
8. Budget Comparison: Regularly compare actual results to budgets and investigate variances
9. Tax Planning: Consider tax implications of accounting decisions
10. Professional Consultation: Engage accounting professionals for complex issues

Resources for Further Learning

Accounting Software

• QuickBooks (small to medium businesses)
• Xero (cloud-based, user-friendly)
• Sage (scalable for growing businesses)
• NetSuite (enterprise-level ERP system)
• FreshBooks (service-based businesses)

Professional Organizations

• American Institute of Certified Public Accountants (AICPA)
• International Federation of Accountants (IFAC)
• Institute of Management Accountants (IMA)
• Association of Chartered Certified Accountants (ACCA)
• Financial Accounting Standards Board (FASB)

Educational Resources

• Coursera and edX accounting courses
• Khan Academy accounting tutorials
• Accounting Coach (online resource with tutorials)
• CPA review courses (Becker, Wiley, Roger)
• Industry-specific accounting guidelines

Books and Publications

• “Financial Accounting” by Warren, Reeve, and Duchac
• “Accounting Principles” by Weygandt, Kimmel, and Kieso
• “The Journal of Accountancy” (AICPA publication)
• “The Accounting Review” (American Accounting Association)
• “International Financial Reporting Standards” (IFRS Foundation)