Accounting 101 Cheat Sheet: Terms, Formulas, Software & More

Accounting might seem complicated and unattainable, but it’s just understanding and recording what comes in, what goes out, and where it all goes.

Knowing these basic accounting concepts can help you stay financially organized and make informed decisions.

This blog is your accounting 101 cheat sheet, where we’ll break down key accounting concepts, essential formulas, and much more. By the end of this, you’ll understand accounting fundamentals and how to implement them in real life. 

TL;DR – Accounting 101 Cheat Sheet

Here are some basic formulas to help you get started on accounting:

• Accounting Formula: Assets = Liabilities + Owner’s Equity 
• Net Income Formula: Net Income = Revenue – Expenses 
• Break-Even Point Formula: Break-even point = Fixed Costs/(Sales – Variable Costs)
• Cash Ratio Formula: Cash Ratio = Cash/Current Liabilities
• Profit Margin Formula: Profit Margin = Net Income/Sales
• Debt-to-Equity Ratio = Total Liabilities/Equity 
• Cost of Goods Sold Formula (COGS): COGS = Beginning Inventory + Cost of Purchasing New Inventory – Ending Inventory
• Current Ratio = Current Assets/Current Liabilities
• Gross Profit Margin Formula: Gross Profit Margin = Gross Profit/Revenue
• Income Statement Formula: Net Income = Income Accounts – Expense Accounts

 

Understanding basic accounting is great for your personal growth, but accurate bookkeeping and financial insights are what you need to drive your business to success. That’s where AccountsBalance comes in. 

We provide accurate and timely records so you can be stress-free about your finances. We offer monthly bookkeeping, financial clean-up, and expert support, an all-in-one accounting service to help you grow.

Sign up today! 

What Is Accounting and Why Is It Important?

Accounting is how you record, organize, and understand your business’s financial information. You segregate all your raw data about transactions and taxes into records that give you a clear picture of your finances.

Why is it important?

• You can keep records of your money to help you know how much you made or spent. 
• It prevents you from overspending, missing payments, and running out of money.
• You can have accurate records to make tax filing easy and to avoid penalties.
• It creates financial records to help you save, invest, or cut costs.
• It shows banks and investors clear financial records when you need to apply for funding.

Key Accounting Terms and Definitions

If you want to learn about your business’s finances, you need to know various accounting terms.

Let’s understand the crucial ones:

Assets

These are tangible or intangible resources that your business owns or controls. 

Assets can be in any form, such as cash, equities, commodities, intellectual property, and real estate, among others. You can acquire assets from past business activities or when you plan to expand your business.

Liabilities

These are your business’s financial obligations, including loans, accounts payable, salaries payable, and taxes. 

Liabilities can be short-term (due within a year) or long-term (due after a year).

Balance Sheet

The balance sheet is a form of financial statement that shows your business’s current assets, liabilities, and owner’s equity. It lists what your company owns (assets), what it owes (liabilities), and the owner’s or shareholders’ stake in the business. 

Accounts Payable (AP)

Accounts payable refers to the total amount of money you owe to the supplier or vendor for purchases you made on credit. 

It is recorded under the liability column on the balance sheet, and you’re expected to pay the amount within a specific period.

Accounts Receivable (AR)

Accounts receivable are the amounts you’ll receive, basically the amounts that your customers owe you for products or services provided on credit. 

They show future cash inflows and are entered as current assets on the balance sheet.

Accrual Accounting

Accrual accounting means recording transactions when they happen—not just when money is exchanged. So, if you make a sale today but the payment will come next month, you will still have to record the income now. 

This ensures you get a clearer and more accurate picture of your company’s financial position.

Bookkeeping

You need a system to record all your transactions, and bookkeeping provides that systematic process of recording sales, purchases, receipts, and payments. 

In a way, it is the foundation of accounting, helping prepare financial statements.

Capital

Capital is your financial resources, such as cash, investments, or assets, that you can use to run and grow your business. 

You can acquire capital by retaining earnings, taking loans, or getting investments.

Cash Flow

This is the net amount of cash that moves in and out of your business over a specific period of time. 

Cash flow is divided into three categories, namely, operating cash flow (from daily operations), investing cash flow (from buying/selling assets), and financing cash flow (from debt or equity transactions).

Cost of Goods Sold (COGS)

The total cost incurred while producing the goods or services you sell is known as the cost of goods sold. 

It includes materials, labor, and manufacturing expenses, excluding indirect costs like marketing or administrative expenses. 

Credit

This entry in financial records increases revenue, liabilities, or equity while simultaneously decreasing assets or expenses.

For example, when you take out a loan, it is recorded as a credit under liabilities. It increases cash (debit) but also increases liability (credit), meaning you have more money to use but also a debt to repay. 

Debit

This is the complete opposite of credit; it increases asset or expense accounts while decreasing liability, equity, or revenue accounts. 

For instance, when you buy equipment with cash, it is recorded as a debit in the asset account. 

Depreciation

Depreciation refers to the decrease in the cost of a fixed asset (e.g., machinery, vehicles, buildings) over time. 

It helps account for the gradual wear and tear of assets. 

Equity

It represents the value that shareholders or owners would receive if all liabilities were paid off. 

Simply put, it represents the owner’s share of the business. 

Financial Statements

These refer to the reports that sum up your company’s financial activities. 

There are three primary financial statements: the balance sheet, which shows financial position; the income statement, which shows profitability; and the cash flow statement, which shows cash movements. 

Expenses 

Expenses are the costs you have to pay to keep running smoothly, such as rent, employee wages, and electricity bills.

For instance, if you run a coffee shop, the amount you pay to buy coffee beans is your expense.

Revenue 

This is the total earnings you gain from selling your goods or services before any costs or expenses are deducted. 

It is also referred to as sales or turnover and is the top line of the income statement.

General Ledger 

Think of the general ledger as your business’s financial diary—it keeps track of every transaction in one place. 

It pulls data from different accounts, giving you a complete snapshot of your company’s finances.

Income Statement

This is a financial report that shows a company’s revenues, expenses, and net profit over a given period of time. 

This is also referred to as a profit and loss statement (P&L). It helps assess business performance.

Net Income

Net income is the profit remaining after all expenses, including taxes and operating costs, have been deducted from revenue. 

It is a key measure of your business’s profitability. 

Accounting Formulas Cheat Sheet

If you’re new to accounting, these fundamental accounting formulas will help you evaluate your financial standing and business performance. 

Here are essential equations categorized by financial statements:

Accounting Formula

Assets = Liabilities + Owner’s Equity

• This basic formula ensures your company’s financial records stay balanced. It shows that all assets are balanced by liabilities or equity.

Net Income Formula

Net Income = Revenue – Expenses

• Net income represents your company’s profit after deducting all expenses, taxes, and other costs from the total revenue. 

Break-Even Point Formula

Break-even point = Fixed Costs / (Sales-Variable Costs)

• The break-even point is when total revenue covers all costs, resulting in neither loss nor profit.

Cash Ratio Formula

Cash Ratio = Cash Current / Liabilities

• This ratio measures your company’s ability to pay off short-term debts using only cash or cash equivalents. A higher ratio would indicate better liquidity.

Profit Margin Formula

Profit Margin = Net Income / Sales

• This ratio shows the percentage of sales revenue that turns into profit after all expenses have been paid. A high-profit margin indicates better profitability.

Debt-to-Equity Ratio 

Debt-to-Equity Ratio = Total Liabilities / Total Equity

• This ratio helps you measure your financial leverage by comparing the company’s total debt to its equity. A high ratio means a higher financial risk.

Cost of Goods Sold (COGS) Formula

COGS = Beginning Inventory + Cost of Purchasing New Inventory – Ending Inventory

• COGS represents the direct costs you incur while producing or purchasing the goods sold. It excludes operating expenses like rent and marketing.

Current Ratio

Current Ratio = Current Assets / Current Liabilities

• The current ratio shows the company’s ability to pay off short-term obligations. A ratio higher than one means the company has more assets than liabilities. 

Gross Profit Formula 

Gross Profit = Revenue – Cost of Goods Sold(COGS)

• Gross profit is the money your company makes after covering all direct costs of production or purchasing of goods. 

Gross Margin Formula

Gross Profit Margin = Gross Profit / Revenue

• This percentage shows how efficiently your company produces goods by comparing gross profit to total revenue. 

Income Statement Formula

Net Income = Income Accounts – Expense Accounts

• This summarizes a company’s financial performance by listing revenues and subtracting expenses over a specific period.

 

These formulas will help you a great deal in your accounting process, but some things get better with expert support. With AccountsBalance, you get a dedicated bookkeeping team working for you to make your books accurate and keep you financially healthy. 

Sign up today and let us take care of your books while you focus on growing your business!

How to Record Your Financial Transactions

Knowing how to record financial transactions is important, even if you don’t have to do it yourself. You can check your books to spot errors and forward them for correction. 

Let’s learn some basics of recording transactions:

• Identify the Transaction: First, know which transactions you want to record. These transactions can involve receiving money, buying raw materials, paying suppliers, or even taking a loan. 

• Determine Which Accounts Are Affected: Following the double-entry accounting system, at least two accounts are involved. This step is essential because when a transaction occurs, one account increases and the other decreases; you have to correctly place them for accuracy. 

• Classify the Transaction: There are various categories a transaction can fall into, but the most common are assets, liabilities, equity, revenue, and expenses. For instance, rent will be classified as an expense because it is the cost of running the business. 

• Implement Double-Entry Accounting: While there is a single-entry system where you can only track cash inflows and outflows, it won’t show you the full picture. In double-entry accounting, each transaction has at least one debit and one credit to balance the books. 

• Record the Transaction in a Journal: The first time you need to record a transaction is in the book of original entries. The transactions are recorded chronologically, making it easy to track financial activities over time.

• Post Transactions to the General Ledger: After recording the transactions in the journal, post them to the general ledger, where all affected accounts are categorized. The systematic recording ensures an accurate and detailed financial overview.

• Prepare a Trial Balance: Towards the end of an accounting period, you need to prepare a trial balance to ensure debits equal credits. If they do not match, recording errors may require correction. 

• Generate Financial Statements: Once transactions are recorded and verified, you can use them to prepare financial statements, such as income statements (showing P&L), balance sheets (showing assets, liabilities, and equity), and cash flow statements (showing cash inflows and outflows). 

• Adjust and Close the Books: When an accounting period ends, adjust your books to include accrued expenses, depreciation, or prepaid expenses. Close temporary accounts, like revenue and expenses, to retain earnings for the next accounting period.

• Maintain and Secure Records: While this step doesn’t come under recording, this is necessary. Keep all your records for tax filing, audits, and business decision-making. 

Essential Financial Statements

Financial statements are like report cards for your business. They show how much money your company makes, what you own, what you owe, and how much cash moves in and out. 

There are typically three main financial statements:

1. Income Statement (Profit and Loss Statement)

The income statement tells you whether your business is making a profit or a loss. It tracks how much money you earn from sales and how much you spend on costs like supplies, rent, and salaries.

Say you have a bakery and sell $5000 worth of cakes, but you have also paid $2000 for ingredients, $1000 for rent, and $500 for other expenses. After all expenses, you have $1,500 left, which is your profit.

2. Balance Sheet

The balance sheet gives you a snapshot of what your business owns (assets), what it owes (liabilities), and, as an owner, your investments (equity). This gives you a view of your financial situation at any given time. 

Also, your balance sheet will always be balanced, meaning what you own (assets) should be equal to what you owe (liabilities) plus what’s yours (equity). 

Note: If assets are not equal to liabilities on your balance sheet, you might have made some mistakes in your accounting process. 

3. Cash Flow Statement

The cash flow statement monitors all the cash coming in and going out of your business. Unlike P&L statements, it only focuses on the actual cash transactions.

You can categorize all the transactions into three sections: operating activities (daily cash sales and expenses), investing activities (cash spent or earned from assets), and financing activities (cash from loans or payments made against debts). 

Think of this statement as your wallet; you must maintain incoming and outgoing cash to avoid running out of money. 

Best Accounting Software

Managing accounting on your own without the help of an accountant can be overwhelming, but the right software can make a lot of difference. 

To help you manage your finances accurately, here are the five best accounting software:

• QuickBooks: QuickBooks is a powerful and easy-to-use accounting tool that offers essential features like invoicing, expense tracking, payroll, and tax management. 

• Xero: Xero is a cloud-based software that enables multiple users, making it great for growing businesses that need collaboration between multiple teams, accountants, and financial advisors.

• FreshBooks: FreshBooks is best for freelancers or service-based businesses, as it offers simple invoicing, expense tracking, and time management to streamline billing and payments.

• Wave: Wave is a great accounting solution that covers basic needs like income and expense tracking, invoicing, and financial reporting.  

• Zoho Books:  Zoho Books offers automation tools, bank reconciliation, and seamless integration with other Zoho business applications, making it great for streamlining your processes.

These software are a great option for beginning your accounting process, but you need professional bookkeeping knowledge. 

With AccountsBalance, you get dedicated experts who can understand the complexities of businesses, from digital payment processors to multi-channel sales. We give you clear financial reports by the 15th of every month, helping you make better decisions. 

Sign up today to experience stress-free bookkeeping with expert support!

Practical Accounting Tips

Understanding basic accounting can help you keep your records clean, make better financial decisions, and avoid costly mistakes. 

Here are some essential accounting tips to keep your books in order:

• Record Transactions Daily: Don’t stall bookkeeping tasks for the next day, as it can lead to forgotten expenses, miscalculations, and cash flow issues. 

• Use Double-Entry Accounting: A double-entry system can prevent errors by recording transactions in two accounts and keeping your books balanced.

• Reconcile Bank Statements Regularly: Comparing your financial records with your bank statements regularly can help you spot errors, missing transactions, or fraudulent activity. 

• Categorize Expenses Correctly: Properly classify expenses so you don’t put rent money under utilities. This will help you prepare for taxes and understand where your money is going.

• Keep All Financial Records Organized: Invoices, receipts, and financial statements should be stored in an organized system so that you get confused when you need them for audits or tax filing.

• Generate Financial Reports Regularly: Review all your financial statements to track your business performance and spot financial issues early.

• Track Accounts Receivable and Payable: Monitor outstanding invoices (money owed to you) and payments due (money you owe) to maintain good cash flow and avoid late fees or bad debt. 

Frequently Asked Questions (FAQs)

Here are some commonly asked questions that might help you further:

Can Anyone Learn Accounting Without a Finance Background?

Yes! Accounting is based on fundamental principles and rules that anyone can learn. Interestingly, 34% of business owners manage their own books, and you can do it too with practice, online resources, and accounting software. 

If not all the way to tax filing, you can handle basic accounting tasks like tracking expenses, recording transactions, and generating financial reports.  

Can Accounting Be Done Without Software?

Yes, accounting can be done manually using spreadsheets or even on paper records, but it is not advisable as it is time-consuming and prone to errors. 

With accounting software, you can automate certain tasks like invoicing and calculating, which reduces mistakes and makes financial reporting easier. A simple Excel sheet might work if you own a small business, but as transactions increase, software becomes more efficient.

Does Cloud Accounting Offer More Benefits Than Traditional Methods?

Yes. Cloud accounting has many advantages over traditional desktop software or manual bookkeeping. It allows you to view your records in real-time from anywhere, automates transactions, provides better security, and makes collaborations with accountants easier. 

While still used, traditional methods lack the convenience and automation of cloud solutions.

What Does an Accountant Actually Do?

An accountant tracks your business’s financial transactions, prepares financial statements, ensures compliance with tax laws, and helps with budgeting and financial planning. 

They also analyze your business’s financial performance and offer advice on improving profitability. While bookkeeping records your daily transactions, accountants interpret the data to guide your decisions.

Conclusion – Accounting Cheat Sheet

By now, you might have learned that accounting is not that difficult if you just understand fundamental principles. If you want to become a successful entrepreneur, then you need to know basic accounting. It will help you track expenses, spot errors, manage invoices, and prepare for tax season. 

Having an accounting basics cheat sheet will help you navigate through the journey and help you make smarter decisions. 

You can use this cheat sheet as a quick reference whenever you need guidance on accounting basics. The more you understand your finances, the better you can plan for growth. 

Need more than just basic accounting? Let AccountsBalance handle your books! We have dedicated bookkeepers with industry knowledge who ensure accurate and timely records and provide tailored financial advice. 

Get started today!