Accounting · Units 1–9 · Quick reference

AccountingPrinciples I

Grades 10–12 · College8 pages

The accounting equation · debits and credits · the accounting cycle · journal entries · adjusting entries · depreciation · closing · the four financial statements · merchandising and inventory · cash and bank reconciliation · receivables · payroll · liabilities and owner’s equity · ratios · GAAP · common errors

1Accounting equation2Debits & credits3Cycle & journal4GAAP5Adjusting entries6Depreciation7Worksheet & closing8Financial statements9Key ratios10Merchandising11Inventory costing12Cash & receivables13Payroll14Liabilities & owner’s equity15Common errors

1The Accounting Equation

A lemonade stand’s first week
Event	Cash	Supplies	Stand	= Payable	+ Owner’s equity
Invest $50 of savings	+50				+50 investment
Buy a stand and pitchers	−30		+30
Buy lemons and cups on credit		+20		+20
Sell lemonade for cash	+65				+65 revenue
Use up supplies		−14			−14 expense
Pay the grocer	−20			−20
Take $10 home	−10				−10 drawing
Balance	55	6	30	0	91

Assets 55 + 6 + 30 = 91 = Liabilities 0 + Owner’s equity 91. Every row keeps both sides equal.

The equation and its expanded form

Assets: what the business owns. Liabilities: what it owes. Owner’s equity: the owner’s claim, A − L. Revenue − expenses = net income.

Assets = Liabilities + Owner’s Equity

A = L + Capital − Drawing + Revenue − Expenses

Revenue: value earned by delivering goods or services
Expense: cost of assets used up or services consumed to earn revenue
Drawing: assets the owner takes out; lowers owner’s equity, not an expense

“For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?” (Luke 14:28, KJV)

The owner is last in line

Creditors are paid first; the owner keeps what is left. So owner’s equity is the remainder: A − L.

2Debits, Credits & T-Accounts

Debit (Dr): left side; from Latin debere, to owe
Credit (Cr): right side; from Latin credere, to trust
Not good or bad: debit and credit mean left and right, nothing more
Contra account: balance opposite its partner: Accumulated Depreciation, Allowance for Doubtful Accounts, Sales Discounts

DEALER (Traditional)

Drawing, Expenses, Assets: debit balances. Liabilities, owner’s Equity (capital), Revenue: credit balances. In a corporation the D is Dividends.

Bank talk is backward

The bank “credits” your deposit because it now owes you. In your books cash went up: a debit.

Bright Day’s June Cash, posted from the journal (section 3). Foot each side; the balance sits on the larger side.

AccountingAccounting · Units 1–9 · continued

3The Accounting Cycle & the Journal

Worked month: Bright Day Laundromat (owner M. Grant), June 2026; the note is due in 2031
Transaction	Debit	Credit	$
Jun 1 Owner invests cash	Cash	Grant, Capital	20,000
Jun 1 Buys machines: $6,000 down, 6% note	Equipment	Cash, Notes Payable	6,000 + 30,000
Jun 1 Pays 12 months’ insurance	Prepaid Insurance	Cash	1,200
Jun 2 Pays June rent	Rent Expense	Cash	1,800
Jun 3 Buys supplies on account	Supplies	Accounts Payable	800
Jun 5 Motel prepays 3 months’ service	Cash	Unearned Revenue	1,500
Jun 15 Pays wages	Wages Expense	Cash	1,200
Jun 20 Bills a café for linens	Accounts Receivable	Laundry Revenue	900
Jun 25 Pays supplier on account	Accounts Payable	Cash	500
Jun 28 Owner withdraws cash	Grant, Drawing	Cash	1,000
Jun 29 Collects from the café	Cash	Accounts Receivable	400
Jun 30 June coin and card revenue	Cash	Laundry Revenue	6,400
Jun 30 Pays utilities	Utilities Expense	Cash	1,100

Journalize, then post

From a source document: debits first, credits indented, an explanation. 3+ accounts: a compound entry.
Post each amount to the same side of its ledger account; the PR columns make the audit trail.

Chart of accounts
No.	Type	Example
100s	Assets	101 Cash
200s	Liabilities	201 Accounts Payable
300s	Owner’s equity	301 Capital
400s	Revenue	401 Laundry Revenue
500s	Expenses	510 Rent Expense

Assets in order of liquidity, Cash first.

Cash basis: revenue when cash comes in; expense when cash goes out
Accrual basis: revenue when earned, expense when incurred; GAAP requires it

General journal format
Account	Debit	Credit
Jun 1 Equipment	36,000
Cash		6,000
Notes Payable		30,000
Bought equipment; $6,000 down, 5-year 6% note
Jun 20 Accounts Receivable	900
Laundry Revenue		900
Billed Corner Café, terms n/30

4GAAP: Principles & Assumptions

Principles and constraints
Principle	Means
Historical cost	record assets at what was paid
Revenue recognition	record revenue when goods or services are delivered (earned)
Matching (expense recognition)	record expenses in the period of the revenue they helped earn
Full disclosure	tell readers everything that would change their judgment (notes)
Consistency	same methods each period; disclose changes
Materiality (constraint)	amounts too small to change a decision may be handled simply
Conservatism (prudence)	in real doubt, do not overstate assets or income

Four assumptions
Assumption	Means
Economic entity	business books apart from the owner’s
Going concern	the business will keep operating
Monetary unit	record only what dollars can measure
Periodicity	report by month, quarter, year

Revenue (ASC 606): contract → obligations → price → allocate → recognize when each is met
Qualities: relevant and faithfully represented
Rule makers: FASB (1973) writes U.S. GAAP; the SEC oversees public companies; most other countries use IFRS

Every Good Man Prays

The four assumptions: Entity, Going concern, Monetary unit, Periodicity.

AccountingAccounting · Units 1–9 · continued

5Adjusting Entries

Bright Day’s seven adjustments
	Kind	Why (June 30)	Entry	$
(a)	Deferral (prepaid)	Insurance used: $1,200 ÷ 12	Dr Insurance Expense; Cr Prepaid Insurance	100
(b)	Deferral (prepaid)	Supplies: $800 − $350 counted	Dr Supplies Expense; Cr Supplies	450
(c)	Depreciation	($36,000 − $3,600) ÷ 120 months	Dr Depreciation Expense; Cr Accumulated Depreciation	270
(d)	Deferral (unearned)	One of 3 months earned	Dr Unearned Revenue; Cr Laundry Revenue	500
(e)	Accrued expense	Wages earned Jun 26–30, unpaid	Dr Wages Expense; Cr Wages Payable	600
(f)	Accrued expense	Interest: $30,000 × 6% × 1/12	Dr Interest Expense; Cr Interest Payable	150
(g)	Accrued revenue	Café linens washed, not yet billed	Dr Accounts Receivable; Cr Laundry Revenue	200

Net effect: revenue +700, expenses +1,570. Skipping them would overstate June’s net income by 870 (3,200 instead of 2,330).

The four kinds (plus depreciation)
Type	Cash moved…	Adjusting entry
Prepaid expense	before the expense	Dr Expense, Cr Prepaid (asset)
Unearned revenue	before the revenue	Dr Unearned (liability), Cr Revenue
Accrued expense	after the expense	Dr Expense, Cr Payable
Accrued revenue	after the revenue	Dr Receivable, Cr Revenue
Depreciation	when the asset was bought	Dr Depreciation Exp., Cr Accum. Depreciation

Three rules

Every adjusting entry has one income-statement account and one balance-sheet account.
Cash is never in an adjusting entry.
Use the amount used or earned, not the amount on hand.

Book value: cost − accumulated depreciation: 36,000 − 270 = 35,730
Reversing entry: optional, first day of the next period: undoes an accrual

Deferral = cash first; accrual = cash later

Deferral: the cash moved first; you defer the revenue or expense until it is earned or used. Accrual: the work came first; the cash will follow.

6Depreciation

A $12,000 washer-extractor: salvage $2,000, life 5 years or 50,000 wash cycles
Year	Straight-line: expense	SL book value	DDB: rate × start BV	DDB expense	DDB book value	Cycles run	Units-of-prod. expense	UOP book value
1	2,000	10,000	40% × 12,000	4,800	7,200	12,000	2,400	9,600
2	2,000	8,000	40% × 7,200	2,880	4,320	11,000	2,200	7,400
3	2,000	6,000	40% × 4,320	1,728	2,592	10,000	2,000	5,400
4	2,000	4,000	40% × 2,592	592	2,000	9,000	1,800	3,600
5	2,000	2,000	40% × 2,000	0	2,000	8,000	1,600	2,000
Total	10,000			10,000		50,000	10,000

Year 4 DDB: 40% × 2,592 = 1,036.80 would drop book value below salvage, so the expense stops at 592; year 5 is 0. All three methods charge the same 10,000 in total.

Three formulas

Straight-line = (cost − salvage) ÷ life: (12,000 − 2,000) ÷ 5 = 2,000 a year.
DDB = (2 ÷ life) × book value at the start of the year: 40% × 12,000 = 4,800. Ignore salvage in the multiply; never go below it.
Units of production = (cost − salvage) ÷ total units × units used: $0.20 × 12,000 = 2,400.

Book value falls to the same salvage line by every method.

Selling the washer after 3 years (SL) Worked

Book value = 12,000 − 6,000 = 6,000
Sold for 5,500: loss 500cash − book value
Dr Cash 5,500; Dr Accum. Depr. 6,000; Dr Loss 500; Cr Equipment 12,000

Rules of thumb

Land is never depreciated.
Cost includes price, freight, installation and testing (capital expenditure); routine repairs are expenses.
Part year: SL × months used ÷ 12.
Depreciation allocates cost; it does not measure market value.

AccountingAccounting · Units 1–9 · continued

7Trial Balance, Worksheet & Closing

Bright Day Laundromat · Worksheet · June 30, 2026
Account	Trial balance Dr	Trial balance Cr	Adjustments Dr	Adjustments Cr	Adjusted TB Dr	Adjusted TB Cr
101 Cash	15,500				15,500
112 Accounts Receivable	500		(g) 200		700
126 Supplies	800			(b) 450	350
130 Prepaid Insurance	1,200			(a) 100	1,100
157 Equipment	36,000				36,000
158 Accumulated Depreciation				(c) 270		270
201 Accounts Payable		300				300
210 Notes Payable		30,000				30,000
220 Unearned Revenue		1,500	(d) 500			1,000
230 Wages Payable				(e) 600		600
240 Interest Payable				(f) 150		150
301 Grant, Capital		20,000				20,000
302 Grant, Drawing	1,000				1,000
401 Laundry Revenue		7,300		(d) 500 (g) 200		8,000
510 Rent Expense	1,800				1,800
520 Utilities Expense	1,100				1,100
530 Wages Expense	1,200		(e) 600		1,800
540 Insurance Expense			(a) 100		100
550 Supplies Expense			(b) 450		450
560 Depreciation Expense			(c) 270		270
570 Interest Expense			(f) 150		150
Totals	59,100	59,100	2,270	2,270	60,320	60,320

Finishing the worksheet

Extend each adjusted balance: revenue and expenses to the Income Statement columns; assets, liabilities, capital and drawing to the Balance Sheet columns.
The difference in the IS columns is net income (2,330); enter it on the debit side of the IS columns and the credit side of the BS columns. Then all four pairs balance.

A trial balance proves only equality

It will not catch: an entry left out or posted twice; the right amount in the wrong account of the same side; two errors that offset.
It will catch: a one-sided posting, a wrong total, a balance in the wrong column, a transposed or slid figure (section 15).

REID (Traditional)

Close in order: Revenue, Expenses, Income Summary, then Drawing (or Dividends).

Do not close

Accumulated Depreciation, Unearned Revenue, Allowance for Doubtful Accounts: they are permanent.
Drawing into Income Summary.

June 30 closing entries	Debit	Credit
(1) Laundry Revenue	8,000
Income Summary		8,000
(2) Income Summary	5,670
Rent Expense		1,800
Utilities Expense		1,100
Wages Expense		1,800
Insurance Expense		100
Supplies Expense		450
Depreciation Expense		270
Interest Expense		150
(3) Income Summary	2,330
Grant, Capital		2,330
(4) Grant, Capital	1,000
Grant, Drawing		1,000

(1) revenue to Income Summary; (2) expenses to Income Summary; (3) net income to capital; (4) drawing straight to capital, never through Income Summary.

Income Summary lives only during closing, then returns to zero.

Post-closing trial balance	Debit	Credit
Cash	15,500
Accounts Receivable	700
Supplies	350
Prepaid Insurance	1,100
Equipment	36,000
Accumulated Depreciation		270
Accounts Payable		300
Notes Payable		30,000
Unearned Revenue		1,000
Wages Payable		600
Interest Payable		150
Grant, Capital		21,330
Totals	53,650	53,650

Only permanent accounts remain. Capital = 20,000 + 2,330 − 1,000 = 21,330.

Why close?

Temporary accounts (revenue, expense, drawing) measure one period; closing zeroes them and moves net income and drawing into capital.
A net loss: debit Capital, credit Income Summary.

Three trial balances

Prove the books three times: before you adjust, after you adjust and after you close.

AccountingAccounting · Units 1–9 · continued

8The Four Financial Statements

Income Statement · month ended June 30
Laundry Revenue		8,000
Rent Expense	1,800
Utilities Expense	1,100
Wages Expense	1,800
Insurance Expense	100
Supplies Expense	450
Depreciation Expense	270
Interest Expense	150
Total expenses		5,670
Net income		2,330

I-O-B-C

Prepare in order: Income, Owner’s equity, Balance sheet, Cash flows; each borrows a number from the one before.

Balance Sheet · June 30, 2026
Current assets
Cash	15,500
Accounts Receivable	700
Supplies	350
Prepaid Insurance	1,100	17,650
Equipment	36,000
Less: accum. depreciation	(270)	35,730
Total assets		53,380
Current liabilities
Accounts Payable	300
Wages Payable	600
Interest Payable	150
Unearned Revenue	1,000	2,050
Notes payable (long-term)		30,000
Total liabilities		32,050
Grant, Capital		21,330
Total liabilities and capital		53,380

Statement of Cash Flows (indirect) · June
Operating activities
Net income	2,330
Add: depreciation	270
Increase in AR, supplies, prepaid	(2,150)
Increase in current liabilities	2,050
Net cash from operating		2,500
Investing: equipment		(6,000)
Financing: 20,000 − 1,000		19,000
Net increase in cash		15,500

Noncash: equipment for a 30,000 note. Direct method: 8,300 − 5,800 = 2,500.

Cash-flow groups

Operating: customers, suppliers, workers
Investing: long-term assets
Financing: owners and lenders

9Key Ratios

Liquidity, activity, solvency, profitability
Ratio	Formula	Hilltop Vending (year)
Current ratio	current assets ÷ current liabilities	9,000 ÷ 3,600 = 2.50
Quick (acid-test)	(cash + short-term investments + AR) ÷ current liabilities	6,000 ÷ 3,600 = 1.67
Working capital	current assets − current liabilities	5,400
Receivables turnover	net credit sales ÷ average AR; days = 365 ÷ turnover	12,000 ÷ 1,000 = 12.0; 30.4 days
Inventory turnover	COGS ÷ average inventory; days = 365 ÷ turnover	22,600 ÷ 2,260 = 10.0; 36.5 days
Debt ratio	total liabilities ÷ total assets	12,000 ÷ 30,000 = 40%
Debt-to-equity	total liabilities ÷ owner’s equity	12,000 ÷ 18,000 = 0.67
Times interest earned	operating income ÷ interest expense	11,500 ÷ 900 = 12.8×
Gross margin	gross profit ÷ net sales	28,800 ÷ 51,400 = 56.0%
Net profit margin	net income ÷ net sales	10,600 ÷ 51,400 = 20.6%
Return on assets	net income ÷ average total assets	10,600 ÷ 29,000 = 36.6%
Return on owner’s equity	net income ÷ average owner’s equity	10,600 ÷ 17,000 = 62.4%

Hilltop, Dec 31: cash 4,800, AR 1,200, inventory 2,400, prepaid 600; assets 30,000 = liabilities 12,000 + owner’s equity 18,000.

DuPont

ROE = net margin × asset turnover × (avg. assets ÷ avg. owner’s equity)
Asset turnover = sales ÷ avg. assets = 1.77; 20.6% × 1.77 × 1.71 ≈ 62.4%.

Using ratios well

Compare with last year and similar businesses.
Unpaid owner work is not an expense, so small-business returns look high.
EPS = (net income − preferred dividends) ÷ avg. common shares.

L-A-S-P

Four questions in order: Liquidity (pay this year?), Activity (how fast?), Solvency (survive the long run?), Profitability (worth it?).

“Be thou diligent to know the state of thy flocks, and look well to thy herds.” (Proverbs 27:23, KJV)

AccountingAccounting · Units 1–9 · continued

10Merchandising

Perpetual vs periodic entries
Event (Hilltop Vending)	Perpetual system	Periodic system
Buy 300 bags at $0.60 on account, 2/10, n/30	Dr Merchandise Inventory 180; Cr Accounts Payable 180	Dr Purchases 180; Cr Accounts Payable 180
Pay within 10 days (2% off)	Dr AP 180; Cr Inventory 3.60; Cr Cash 176.40	Dr AP 180; Cr Purchase Discounts 3.60; Cr Cash 176.40
Pay freight in	Dr Merchandise Inventory 15; Cr Cash 15	Dr Freight-In 15; Cr Cash 15
Sell for $1,050 cash (cost $420)	Dr Cash 1,050; Cr Sales Revenue 1,050 and Dr Cost of Goods Sold 420; Cr Inventory 420	Dr Cash 1,050; Cr Sales Revenue 1,050 only
Refund $3 (jammed machine)	Dr Sales Returns and Allowances 3; Cr Cash 3	same
Period end	count; shrinkage: Dr COGS, Cr Inventory	count; compute COGS

Periodic COGS = beginning inventory + net purchases − ending inventory Worked

Net purchases = 23,230 + 400 − 300 − 450 = 22,880
Goods available = 2,120 + 22,880 = 25,000
COGS = 25,000 − 2,400 = 22,600count: 2,400 left

Perpetual never sleeps

Perpetual updates inventory and COGS with every sale (a scanner does it). Periodic waits for the count.

Multi-step income statement · Hilltop Vending · year
Sales revenue		52,000
Less: sales returns and allowances		(600)
Net sales		51,400
Cost of goods sold		(22,600)
Gross profit		28,800
Operating expenses (itemized on the statement)		(17,300)
Operating income		11,500
Interest expense		(900)
Net income		10,600

Expenses: commissions 5,200, van 6,400, depreciation 3,000, other 2,700. Gross margin 56.0%.

Terms of trade
Term	Meaning
2/10, n/30	2% off if paid in 10 days; full amount due in 30
FOB shipping point	buyer owns the goods once shipped; buyer pays freight
FOB destination	seller owns them until delivered; seller pays freight
Sales discounts, returns and allowances	contra-revenue: subtract from sales to get net sales
Shrinkage	theft, damage, error: records − count

11Inventory Costing

Same goods, three answers
Method	Cost of goods sold	$	Ending inventory	Gross profit
FIFO	200 × 0.50 + 300 × 0.60 + 200 × 0.70	420	300 × 0.70 = 210	630
LIFO	500 × 0.70 + 200 × 0.60	470	100 × 0.60 + 200 × 0.50 = 160	580
Weighted average	700 × 0.63	441	300 × 0.63 = 189	609

Each method splits the same 630: COGS + ending inventory = goods available. Weighted-average unit cost = 630 ÷ 1,000 = $0.63.

Hilltop Vending: one snack, March (periodic)
Layer	Units	Unit cost	Total
Mar 1 on hand	200	0.50	100
Mar 10 bought	300	0.60	180
Mar 20 bought	500	0.70	350
Goods available	1,000		630

Sold 700 units at $1.50 = 1,050 of sales.

When costs rise	FIFO	LIFO
COGS	lowest	highest
Net income, taxes	highest	lowest
Ending inventory	near current cost	old, low costs
Allowed	GAAP and IFRS	GAAP only; not IFRS

Weighted average falls between. Prices falling? The order flips.

FIFO sends the oldest layers to COGS; LIFO the newest.

Inventory errors

Ending inventory overstated → COGS too low → net income too high this year and too low next year. The two offset, but both years are wrong.

More rules

Specific identification: each unit’s actual cost (cars, jewelry).
Consistency: keep one method; disclose a change. LIFO conformity: LIFO for taxes means LIFO in the books.
Lower of cost and net realizable value (FIFO, average): write inventory down when worth less than cost.
Perpetual FIFO = periodic FIFO; perpetual LIFO and average can differ.

First in, first out the door

FIFO: the oldest snacks leave first, so the shelf holds the newest costs. LIFO: last in, first out; the oldest costs stay on the shelf.

AccountingAccounting · Units 1–9 · continued

12Cash & Receivables

Bank reconciliation, March 31
Hilltop Vending	$		$
Bank side		Book side
Balance per bank, Mar 31	3,420	Balance per books	3,813
+ Deposit in transit	860	+ Interest earned	5
− Outstanding check #211	(240)	− Service charge	(15)
− Outstanding check #214	(395)	− NSF check (host site)	(140)
		− Error: check #212 for 86 recorded as 68	(18)
Adjusted cash	3,645	Adjusted cash	3,645

Entries (book side only)	Debit	Credit
Cash	5
Interest Revenue		5
Bank Service Charge Expense	15
Cash		15
Accounts Receivable	140
Cash		140
Repairs Expense	18
Cash		18

Bank-side items need no entry: the bank will catch up. 86 − 68 = 18, a transposition (divisible by 9).

Allowance method
Event	Entry	NRV
Estimate (aging)	Dr Bad Debt Expense 350; Cr Allowance 350	7,530
Write off a $90 account	Dr Allowance 90; Cr Accounts Receivable 90	7,530 (no change)
It pays after all	Dr AR 90; Cr Allowance 90; then Dr Cash 90; Cr AR 90	7,440 + cash 90

Who hasn’t heard the news?

Deposits in transit and outstanding checks are news the bank hasn’t heard. Fees, NSF checks and interest are news you hadn’t heard: only these get entries.

Petty cash: replenish a $100 fund	Debit	Credit
Postage Expense	28
Supplies Expense	41
Delivery Expense	17
Cash Short and Over	2
Cash		88

Receipts 86; the box holds 12, not 14: 2 short. A check for 88 refills it to 100.

Aging schedule
Age (Bright Day, Dec 31)	Balance	Rate	Estimate
Not yet due	5,000	1%	50
1–30 days past due	1,800	5%	90
31–60 days	900	20%	180
Over 60 days	300	50%	150
Total	8,000		470

Need 470; the allowance already has a 120 credit, so the entry is 350.

Internal control

Separate duties: whoever handles cash does not record it or reconcile the bank; deposit daily.
Fraud triangle: pressure, opportunity, excuse; controls remove the opportunity.
“Providing for honest things, not only in the sight of the Lord, but also in the sight of men.” (2 Corinthians 8:21, KJV)

Percent of sales: computes the expense: credit sales 40,000 × 1% = 400, whatever the balance
Aging: computes the ending allowance; a debit balance first? add it: 470 + 60 = 530
Net realizable value: AR − allowance: 8,000 − 470 = 7,530
Direct write-off: expense only at write-off; not GAAP when bad debts are material

Write-off changes nothing

A write-off lowers both AR and the allowance: net realizable value and net income do not move. The expense came with the estimate.

13Payroll Basics

One week, one attendant Worked

Regular: 40 × 16.00 = 640.00
Overtime: 6 × (16.00 × 1.5) = 144.001½× over 40 hours
Gross pay = 784.00
Social Security 6.2% = 48.61; Medicare 1.45% = 11.37withheld
Income tax withheld (IRS and state tables) = 60.00given
Net pay = 664.02take-home

“for the labourer is worthy of his hire.” (Luke 10:7, KJV)

Record the payroll	Debit	Credit
Wages Expense	784.00
Social Security Tax Payable		48.61
Medicare Tax Payable		11.37
Income Taxes Payable		60.00
Cash (or Wages Payable)		664.02

Who pays what
Tax (2026)	Worker	Employer	Wage cap
Social Security	6.2%	6.2%	$184,500
Medicare	1.45%*	1.45%	none
FUTA	—	0.6% net	$7,000
SUTA	—	by state	varies

*Plus 0.9% over $200,000. FUTA: 6.0% less up to 5.4% state credit. Rates change yearly.

Employer’s payroll taxes	Debit	Credit
Payroll Tax Expense	85.85
Social Security Tax Payable		48.61
Medicare Tax Payable		11.37
FUTA Tax Payable		4.70
SUTA Tax Payable		21.17

Employer matches FICA; FUTA 0.6% × 784 = 4.70; SUTA at a sample 2.7% = 21.17.

Three piles from one paycheck

Gross pay splits into what the worker keeps, what the government gets (a liability) and what the worker chose to save. Employer taxes sit on top.

AccountingAccounting · Units 1–9 · continued

14Liabilities & Owner’s Equity

Three forms of ownership
	Sole proprietorship	Partnership	Corporation
Owner’s equity accounts	Capital	a Capital account per partner	Common Stock, Additional Paid-in Capital, Retained Earnings
Cash to owners	Drawing	Drawing (each partner)	Dividends, declared by the board
Statement	owner’s equity	partners’ equity	retained earnings
Owners’ liability	unlimited	unlimited (general partners)	limited to the investment
Income tax	owner	partners	corporation, then stockholders on dividends

Notes and interest Worked

30,000 × 6% × 1/12 = 150 a monthI = P × r × t
90-day note: 4,000 × 9% × 90/360 = 90360-day year
Repay: Dr Notes Payable 4,000; Dr Interest Expense 90; Cr Cash 4,090

Issue stock; pay a dividend Worked

1,000 shares, $1 par, at $12: Dr Cash 12,000; Cr Common Stock 1,000; Cr Paid-in Capital 11,000
Declare $0.50 a share: Dr Retained Earnings 500; Cr Dividends Payable 500record date: no entry
Pay: Dr Dividends Payable 500; Cr Cash 500

Bonds, simply Worked

10-year, 100,000 face, 5%, paid semiannually
Cash interest = 100,000 × 5% × ½ = 2,500
Sold at 98 (market rate above 5%): discount 2,000 ÷ 20 = 100straight-line
Interest expense = 2,500 + 100 = 2,600

Current: due within a year: payables, unearned revenue, current part of long-term debt
Long-term: notes, mortgages, bonds, most leases over 12 months
Contingent: record if probable and estimable; else disclose if reasonably possible

Retained earnings

4,000 + 3,200 − 500 = 6,700. Retained earnings are not cash.

Beginning RE + Net income − Dividends

Splitting partnership income Worked

Net income 30,000; salaries A 10,000, B 8,000
5% on capital: A 1,000; B 500
Remainder 10,500 split equally: 5,250 each
A 16,250; B 13,750total 30,000

“Owe no man any thing, but to love one another” (Romans 13:8, KJV)

15Common Errors & Fixes

Ten common slips
Slip	Right way
Withdrawal recorded as an expense	Dr Drawing; it never touches the income statement
Owner investment recorded as revenue	Cr Capital
Depreciating land	land is never depreciated
Crediting Equipment for depreciation	credit Accumulated Depreciation
Cash in an adjusting entry	adjustments never touch Cash
Supplies expense = supplies on hand	expense = supplies used
Paying a bill on account as an expense	Dr Accounts Payable; the expense was recorded with the bill
Balance sheet dated “For the year ended”	one date: “December 31, 2026”
Outstanding checks on the book side	they go on the bank side
Debiting Bad Debt Expense at write-off (allowance method)	Dr Allowance; the expense came with the estimate

Finding the difference
Trial balance off by…	Look for
the amount of one entry	a posting left out, or one side not posted
twice an amount (÷ 2)	a debit posted as a credit, or the reverse
a multiple of 9 (÷ 9)	transposition (540 as 450: off by 90) or slide (1,250 as 125: off by 1,125)
a round 10, 100, 1,000	an addition error

“A false balance is abomination to the LORD: but a just weight is his delight.” (Proverbs 11:1, KJV)

Correcting entry Worked

Utility bill 1,100 was debited to Rent Expensealready posted
Dr Utilities Expense 1,100; Cr Rent Expense 1,100move it
Never erase a posted entry: the correction leaves an audit trail

Balanced is not the same as right

A trial balance can balance with the wrong account, a missing entry or two offsetting errors. Trace the source document.

Check before you hand it in

Every entry: debits = credits, with an explanation.
Trial balance, adjusted trial balance and post-closing trial balance all balance.
Net income on the income statement = the figure in the statement of owner’s equity.
Balance sheet balances; ending cash = cash-flow statement’s ending cash.