Accounting study guide
This guide is designed to help you understand the core ideas that commonly appear in introductory college Accounting courses. Read the explanation, follow the example, then try the practice questions without looking back. The goal is to understand the reasoning—not just memorize an answer.
Course requirements vary by school and instructor. Use this as a learning and review resource alongside your assigned textbook, lectures, and instructor guidance.
Accounting equation
Concept: The accounting equation is Assets = Liabilities + Equity. Every transaction must keep this relationship balanced. Assets are resources controlled by the business, liabilities are obligations, and equity is the owners’ residual interest.
Worked example: If an owner invests $10,000 cash, assets increase $10,000 and equity increases $10,000. If the business then borrows $4,000, assets and liabilities each increase $4,000.
Remember: Every transaction affects at least two accounts; the equation must remain balanced; revenue and expenses ultimately affect equity.
Common mistakes: Treating cash as the only asset; assuming every cash receipt is revenue; forgetting the equity effect of income/expenses.
Practice it
- A company buys equipment for cash: what changes?
- Borrow $5,000 from a bank: what changes?
- Define equity in the equation.
Debits & credits
Concept: Debits and credits are the two sides of double-entry accounting; they do not simply mean increase and decrease. Assets and expenses normally increase with debits, while liabilities, equity, and revenues normally increase with credits. Every journal entry has equal total debits and credits.
Worked example: Pay $500 cash for rent: debit Rent Expense $500 and credit Cash $500. Expense increases with a debit; asset cash decreases with a credit.
Remember: DEALER memory aid: Dividends, Expenses, Assets increase with Debits; Liabilities, Equity, Revenues increase with Credits.
Common mistakes: Calling debit “bad” and credit “good”; forgetting normal balances; making unequal entries.
Practice it
- Record $1,000 cash service revenue.
- Which side increases an asset?
- Which side normally increases a liability?
Journal entries
Concept: Journal entries record transactions in chronological order using debits and credits. Analyze which accounts are affected, classify each account, decide whether each increases or decreases, then apply the normal debit/credit rules.
Worked example: Buy supplies for $300 cash: debit Supplies $300, credit Cash $300. Both are assets, but one increases and the other decreases.
Remember: Identify accounts first; use evidence from the transaction; debits must equal credits.
Common mistakes: Choosing debit/credit before deciding account type; recording only the cash side; confusing expense with asset purchases.
Practice it
- Record a $2,000 cash sale of services.
- Record purchase of $800 equipment on account.
- Why must debits equal credits?
Adjusting entries
Concept: Adjusting entries update accounts at period end so revenues and expenses are recognized in the proper period. Common adjustments involve accrued revenues/expenses, deferred revenues, prepaid expenses, and depreciation. They usually affect one income-statement account and one balance-sheet account.
Worked example: If $1,200 prepaid insurance covers 12 months and one month has expired, debit Insurance Expense $100 and credit Prepaid Insurance $100.
Remember: Adjust for time/usage; distinguish accruals from deferrals; adjusting entries help apply accrual accounting.
Common mistakes: Using cash movement as the only trigger; forgetting accumulated depreciation; reversing the direction of prepaid-expense adjustments.
Practice it
- Adjust $600 supplies down to $150 remaining.
- Why are adjusting entries needed?
- Does an adjusting entry always involve cash?
Financial statements
Concept: The main financial statements communicate different aspects of performance and position. The income statement reports revenues and expenses over a period; the balance sheet reports assets, liabilities, and equity at a date; the cash flow statement explains cash changes; the statement of equity explains equity changes.
Worked example: Net income from the income statement flows into equity, helping connect statements. Ending cash on the cash flow statement should agree with cash on the balance sheet.
Remember: Know “period” vs “point in time”; statements connect; net income is not the same as cash flow.
Common mistakes: Using revenue as cash collected; confusing balance sheet with income statement; ignoring statement connections.
Practice it
- Which statement reports assets?
- Which reports revenues and expenses?
- Why can net income differ from cash flow?
Ratio basics
Concept: Financial ratios turn statement amounts into relationships that help compare liquidity, profitability, efficiency, or leverage. Ratios need context: industry, time trend, accounting choices, and company strategy all affect interpretation.
Worked example: Current ratio = current assets/current liabilities. If current assets are $120,000 and current liabilities $80,000, the current ratio is 1.5. That suggests $1.50 of current assets per $1 of current liabilities, but quality of assets still matters.
Remember: Compute consistently; compare with meaningful benchmarks; one ratio rarely tells the whole story.
Common mistakes: Calling a higher ratio always better; comparing unrelated industries without context; ignoring accounting definitions.
Practice it
- Compute current ratio for 90,000/60,000.
- Why can one ratio be misleading?
- What does a profitability ratio generally assess?