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Accounting Reference01

Fundamentals

Debits and credits, cash versus accrual, and how the three statements tie together.

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Reference Notes

Double-entry bookkeeping, debits and credits, the accounting equation

Every transaction is recorded twice, as equal debits and credits, so the ledger always satisfies assets = liabilities + equity. Debits increase assets and expenses and decrease liabilities, equity and revenue; credits do the reverse. A trial balance whose debits equal its credits proves the arithmetic of posting, not that any entry went to the right account or the right period.

Source: Practice; FASB Concepts StatementsLast revised September 2026General information, not advice

Cash basis versus accrual basis accounting: the difference between them, tax basis and modified cash basis

Accrual accounting records revenue as control of the goods or services passes to the customer and expenses when they are incurred, whether or not cash has moved, which is what makes a month's profit comparable to the last one. Cash-basis accounting records money as it arrives and leaves, which is simpler and can be fine for a very small business for tax purposes where permitted, but it hides receivables, payables and prepaid or accrued amounts. US GAAP financial statements are on the accrual basis; a lender may accept statements on the tax basis or a modified cash basis, which are special purpose frameworks, while an investor or a buyer will expect accrual books.

Source: FASB Concepts Statement 8, chapter 1 (accrual accounting); ASC 606 (revenue); AICPA AU-C 800 (special purpose frameworks); practiceLast revised September 2026General information, not advice

The three financial statements and how they tie together, restricted cash, changes in equity

The balance sheet is a position at a moment; the income statement and the cash flow statement cover the period between two balance sheets, and changes in equity are shown in a statement of their own or in the notes (ASC 505-10-50-2). Net income flows into retained earnings, and a cash flow statement on the indirect method starts from net income, adds back non-cash items and working-capital movements, and ends at cash, cash equivalents and restricted cash together, which reconciles to the balance sheet lines that hold them (ASC 230-10-45-4, 50-8). On the direct method it lists receipts and payments instead, and the reconciliation from net income is shown separately (ASC 230-10-45-30). If the statements do not tie, something is wrong in the books rather than in the statements.

Source: FASB ASC 205, 210, 220, 230 (230-10-45-4, 45-30, 50-8); ASC 505-10-50-2Last revised September 2026General information, not advice

Chart of accounts design

A chart of accounts is a list of the buckets the ledger sorts into: assets, liabilities, equity, revenue, cost of sales and operating expenses, usually numbered by type. Keep it short enough to read on one page and use dimensions such as classes, departments or projects for the detail, rather than one account per customer or vendor. Every account should have a purpose somebody can state, and an account that has not been used in a year is a candidate for closing.

Source: PracticeLast revised September 2026General information, not advice

Trial balance and adjusting entries

The trial balance lists every account's balance at a date; an unadjusted one is what the ledger says before month-end work and an adjusted one is what the statements are built from. Adjusting entries record what the transaction feed cannot: accruals, prepaid amortization, depreciation, deferred revenue, allowances and corrections. Each adjusting entry needs a date, the accounts and amounts, a description a stranger could follow, and support attached to it.

Source: PracticeLast revised September 2026General information, not advice

Journal entries, reversing entries and supporting documentation

A manual journal entry is the highest-risk thing in a ledger because nothing outside the books forces it to be right, so every one should carry support and a reviewer other than its author where the team allows. Accruals are usually reversed on the first day of the next period so the actual invoice posts cleanly when it arrives. A journal listing, filtered to manual entries, is one of the first things an auditor or a buyer's diligence team asks for.

Source: PracticeLast revised September 2026General information, not advice

Statement of cash flows: operating, investing and financing, indirect method

The cash flow statement sorts every cash movement into operating, investing or financing activities. The indirect method, which nearly every private company uses, starts with net income, adds back non-cash charges such as depreciation, and adjusts for changes in working capital to reach cash from operations. Under GAAP interest paid and received sit in operating activities and dividends paid in financing; IAS 7 has allowed choices there, and for annual periods beginning on or after January 1, 2027, IFRS 18 puts interest paid in financing and interest and dividends received in investing for most companies.

Source: FASB ASC 230; IAS 7 as amended by IFRS 18Last revised September 2026General information, not advice

Study

Test Yourself

A few questions on Fundamentals, drawn from the notes on this page, to check what stuck.

The assistant writes these questions from the reference notes on this page each time you ask. A generated question or answer can be wrong: check it against the standard the explanation names. General information, not advice.

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How to Read These Notes

General information, not advice.

A note is about accounting in general. It is not advice about your situation and it is not an engagement. When a number matters — a filing, a covenant, a sale — put it to a person.

Each note names its source.

Read the standard it cites before you act on it. “Last revised” is the month the note was last written or corrected against that source.

A question these notes do not answer.

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A note answers a general question. Your books answer the specific one — the first conversation is a look at them and an honest answer about whether we are the right firm.

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