Learn accounting under 5 hours!

Step 1: Identify transactions

Example: 40,000$

Step 2: Prepare journal entries

Double-entry accounting

Debit == Credit

Step 3: Post to general ledger

General ledger is basically a database of all journal entries

Account

Assets

Liabilities

Equities

Revenue

Expenses

Dividends (withdrawals)

T-accounts

Visualize categories of accounts

Step 4: Unadjusted trial balance

Closing balance - accumulative total affecting all your accounts

Trial - test

Balance - Debit and credit balance

Unadjusted - not adjusted entries (usually by date)

Post adjusting entries

cash accounting vs accrual accounting

Cash accounting is a method in which a business records its transactions when it actually receives or pays cash. In other words, under cash accounting, revenues and expenses are recognized only when the cash changes hands. For example, if you sell a cup of lemonade for $2, you would record the revenue of $2 at the moment you receive the cash payment.

Accrual accounting, on the other hand, is a method in which a business records its transactions when they are incurred or earned, regardless of when the cash is received or paid. For example, if you make a batch of lemonade today and sell it tomorrow, under accrual accounting you would record the revenue when the lemonade is sold, even if the customer doesn't pay for it until next week.

Deferred revenue - revenue that is not yet counted for trial balance. money that a company has received from someone, but hasn't actually earned yet.

Adjusted trial balance

Step 7: Create financial statements

Balance sheet

Balance sheet - financial statement that shows a snapshot of a company's financial position at a specific point in time. It provides a summary of a company's assets, liabilities, and equity.

Here's a brief explanation of the three main components of a balance sheet:

Assets: These are the resources that a company owns and that have economic value. Examples of assets include cash, accounts receivable (money owed to the company by its customers), inventory, and property, plant, and equipment (e.g. buildings, machinery, and vehicles).

Liabilities: These are the debts that a company owes to others. Examples of liabilities include accounts payable (money owed by the company to its suppliers), loans, and taxes owed.

Equity: This is the value of a company's assets that is attributable to its owners (shareholders or members). Equity includes the value of shares issued by the company, retained earnings (profits that have been reinvested in the company), and other reserves.

Income statement

Income statement - financial statement that shows a company's revenues, expenses, and net income (or net loss) over a specific period of time, such as a quarter or a year. It is also known as a profit and loss statement (P&L).

The income statement is typically organized into several sections, including:

Revenue: This section shows the company's sales or other sources of revenue during the period.

Cost of Goods Sold (COGS): This section shows the direct costs associated with producing or delivering the products or services sold by the company.

Gross Profit: This is the difference between revenue and COGS, and represents the profit the company earns before deducting operating expenses.

Operating Expenses: These are the costs incurred by the company to operate its business, such as rent, salaries, marketing expenses, and office supplies.

Operating Income: This is the difference between gross profit and operating expenses, and represents the profit the company earns from its operations.

Other Income/Expenses: This section shows any non-operating income or expenses, such as interest income or expenses, gains or losses from the sale of assets, or income or expenses from investments.

Net Income (or Loss): This is the bottom line of the income statement, and represents the profit or loss the company earned during the period.

Cash flow statement

Cash flow statement is a financial statement that shows the inflows and outflows of cash and cash equivalents for a company over a specific period of time, such as a quarter or a year. It provides information about how cash is generated and used by a company, and is an important tool for analyzing a company's liquidity and financial health.

The cash flow statement is organized into three main sections:

Operating activities: This section shows the cash flows generated from a company's core business operations, such as the cash received from customers and the cash paid to suppliers and employees.

Investing activities: This section shows the cash flows generated from a company's investments in assets, such as property, plant, and equipment, and from the sale or purchase of other investments.

Financing activities: This section shows the cash flows generated from a company's financing activities, such as the cash received from issuing stock or bonds, and the cash paid out for dividends or debt repayment.

Post closing entries

Accounting equation

Debits and credits

Why debits and credits are not backwards

The reason that debits and credits may seem confusing in banking is that they are used differently in banking than they are in accounting. In banking, a "debit" is often used to indicate an increase in a customer's account balance, while a "credit" is used to indicate a decrease in the customer's account balance. This is opposite to the way debits and credits are used in accounting, where a debit is used to record an increase in assets or expenses, and a credit is used to record an increase in liabilities, equity, or revenue.