Accounting Entries, Financial Statements & Key Ratios

Posted on Feb 19, 2026 in Financial and Accounting Management

Adjusted Trial Balance Format

Debit Accounts

  • Cash
  • Accounts Receivable
  • Interest Receivable
  • Notes Receivable (short-term)
  • Supplies
  • Prepaid Insurance
  • Prepaid Rent
  • Merchandise Inventory
  • Debt Investments (short-term)
  • Land
  • Buildings
  • Equipment
  • Vehicles
  • Patents
  • Copyrights
  • Trademarks
  • Goodwill
  • Dividends
  • Cost of Goods Sold
  • Wages Expense
  • Salaries Expense
  • Depreciation Expense—Buildings
  • Depreciation Expense—Equipment
  • Insurance Expense
  • Utilities Expense
  • Interest Expense
  • Supplies Expense
  • Rent Expense
  • Advertising Expense
  • Delivery Expense
  • Office Supplies Expense
  • Income Tax Expense

Credit Accounts

  • Accumulated Depreciation—Buildings
  • Accumulated Depreciation—Equipment
  • Accounts Payable
  • Wages Payable
  • Interest Payable
  • Common Dividend Payable
  • Unearned Revenue
  • Notes Payable (short-term)
  • Notes Payable (long-term)
  • Bonds Payable
  • Mortgage Payable
  • Common Stock
  • Preferred Stock
  • Paid-In Capital Excess Par
  • Treasury Stock (debit-balance contra-equity)
  • Retained Earnings
  • Sales Revenue
  • Service Revenue
  • Interest Revenue

Debits Equal Credits

Debits = Credits

Adjusting Entries

  • Depreciation: Dr Depreciation Expense / Cr Accumulated Depreciation — Formula: (Cost – Salvage) / Useful Life
  • Prepaid Insurance Used: Dr Insurance Expense / Cr Prepaid Insurance
  • Prepaid Rent Used: Dr Rent Expense / Cr Prepaid Rent
  • Supplies Used: Dr Supplies Expense / Cr Supplies
  • Unearned Revenue Earned: Dr Unearned Revenue / Cr Service Revenue
  • Accrued Wages: Dr Wages Expense / Cr Wages Payable
  • Accrued Interest Expense: Dr Interest Expense / Cr Interest Payable
  • Accrued Interest Revenue: Dr Interest Receivable / Cr Interest Revenue
  • Accrued Service Revenue: Dr Accounts Receivable / Cr Service Revenue

Merchandising Entries

  • Purchase Inventory: Dr Merchandise Inventory / Cr Cash or Accounts Payable
  • Freight FOB Shipping Point (buyer owns in transit): Dr Merchandise Inventory / Cr Cash
  • Freight FOB Destination (seller owns in transit): Dr Delivery Expense / Cr Cash
  • Purchase Discount: Dr Accounts Payable / Cr Merchandise Inventory / Cr Cash
  • Sale on Credit: Dr Accounts Receivable / Cr Sales
  • Sale Cost Entry: Dr Cost of Goods Sold / Cr Merchandise Inventory
  • Sales Return: Dr Sales Returns and Allowances / Cr Accounts Receivable
  • Sales Return Cost: Dr Merchandise Inventory / Cr Cost of Goods Sold
  • Payment with Discount: Dr Cash / Dr Sales Discounts / Cr Accounts Receivable

Corporation Entries

  • Issue Stock at Par: Dr Cash / Cr Common Stock
  • Issue Stock Above Par: Dr Cash / Cr Common Stock / Cr Paid-In Capital Excess Par
  • Declare Dividend: Dr Retained Earnings / Cr Dividend Payable
  • Pay Dividend: Dr Dividend Payable / Cr Cash
  • Purchase Treasury Stock: Dr Treasury Stock / Cr Cash

Closing Entries

  1. Step 1 — Close Revenues: Dr All Revenue Accounts / Cr Income Summary
  2. Step 2 — Close Expenses: Dr Income Summary / Cr All Expense Accounts
  3. Step 3 — Net Income: Dr Income Summary / Cr Retained Earnings
  4. Step 3 — Net Loss: Dr Retained Earnings / Cr Income Summary
  5. Step 4 — Close Dividends: Dr Retained Earnings / Cr Dividends

Key Definitions

  • Current Asset: Converts to cash within 1 year or the operating cycle
  • Long-Term Investment: Held more than 1 year
  • Property, Plant, and Equipment: Tangible long-term assets used in operations
  • Intangible Assets: No physical substance (patents, copyrights, trademarks, goodwill)
  • Current Liability: Payable within 1 year or the operating cycle
  • Long-Term Liability: Payable after 1 year
  • Revenue Recognition: Recognize when a performance obligation is satisfied
  • Expense Recognition (Matching): Expenses follow revenues
  • Prepaid Expenses: Assets paid in advance that expire through use or time
  • Unearned Revenue: Liability until the service is performed
  • Accrued Revenues: Earned but not yet received or recorded
  • Accrued Expenses: Incurred but not yet paid or recorded
  • Book Value: Asset Cost – Accumulated Depreciation
  • Contra Account: Opposite normal balance; subtracted from the related account
  • Treasury Stock: Own stock reacquired (contra-equity; debit balance)
  • Par Value: Assigned value per share
  • Paid-In Capital: Cash and assets received for stock
  • Retained Earnings: Cumulative net income not distributed as dividends
  • Preferred Stock: Priority on dividends and liquidation; may lack voting rights
  • Cumulative Dividend: Must pay current and unpaid prior years before common dividends (arrears disclosed in notes, not recorded)

Credit Terms

  • 2/10 n/30: 2% discount if paid within 10 days; net due in 30 days
  • n/10: Net due in 10 days; no discount

Contra Accounts

  • Sales Discounts — contra-revenue (debit)
  • Sales Returns and Allowances — contra-revenue (debit)
  • Accumulated Depreciation — contra-asset (credit)
  • Treasury Stock — contra-equity (debit)

Multiple-Step Income Statement

Sales Revenue – Sales Discounts – Sales Returns and Allowances = Net Sales
Net Sales – Cost of Goods Sold = Gross Profit
Gross Profit – Operating Expenses (Selling and Administrative) = Income from Operations
Income from Operations + Other Revenues and Gains – Other Expenses and Losses = Income Before Income Taxes
Income Before Income Taxes – Income Tax Expense = Net Income

Statement of Retained Earnings

Beginning Balance + Net Income (or – Net Loss) – Dividends = Ending Balance

Balance Sheet — Assets

Current Assets

Cash / Accounts Receivable / Interest Receivable / Supplies / Prepaid Insurance / Prepaid Rent / Merchandise Inventory / Debt Investments (short-term) = Total Current Assets

Long-Term Investments

Investment in Stock / Investment in Bonds / Investment in Real Estate / Long-Term Notes Receivable = Total Long-Term Investments

Property, Plant, and Equipment

Land / Buildings – Accumulated Depreciation—Buildings / Equipment – Accumulated Depreciation—Equipment / Vehicles – Accumulated Depreciation—Vehicles = Total Property, Plant, and Equipment

Intangible Assets

Patents / Copyrights / Trademarks / Goodwill = Total Intangible Assets

Total Assets

Total Assets

Balance Sheet — Liabilities and Equity

Current Liabilities

Accounts Payable / Wages Payable / Salaries Payable / Interest Payable / Common Dividend Payable / Preferred Dividend Payable / Unearned Revenue / Notes Payable (short-term) / Current Portion of Long-Term Debt = Total Current Liabilities

Long-Term Liabilities

Notes Payable (long-term) / Bonds Payable / Mortgage Payable / Lease Liabilities / Pension Liabilities = Total Long-Term Liabilities

Total Liabilities

Total Liabilities

Stockholders’ Equity

Common Stock / Paid-In Capital Excess Par — Common / Preferred Stock / Paid-In Capital Excess Par — Preferred / Retained Earnings – Treasury Stock = Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

Accounting Principles

  • Accrual Basis Accounting: Revenues when earned regardless of cash receipt; expenses when incurred regardless of cash payment. Preferred under GAAP because it provides more timely and accurate information.
  • Periodicity Assumption: Divides economic life into artificial time periods (month, quarter, year). Explains why adjusting entries are necessary at period end.
  • Revenue Recognition Principle: Recognize revenue when the performance obligation is satisfied to the customer. A 5-step process determines when to recognize.

Corporation Key Concepts

  • Corporation Characteristics: Separate legal entity created by law; has many of the same rights as an individual; limited liability for stockholders.
  • Stockholder Rights: Vote for directors; share in corporate earnings via dividends; maintain the same percentage ownership (preemptive right); residual claim on assets upon liquidation.
  • Stockholder Powers: Elect the board of directors who hire executives; do NOT have power to bind the corporation to contracts; NOT personally liable for corporate debts.
  • Share Transfer Effect: Sale of shares from one stockholder to another does NOT impact operations unless it changes the makeup of directors.
  • Dividends: Must be declared by the board of directors before being paid; reduce Retained Earnings; NOT an expense.

Financial Ratios

  • Profit Margin = Net Income / Net Sales
  • Current Ratio = Current Assets / Current Liabilities
  • Acid-Test Ratio = (Cash + Short-term Investments + Accounts Receivable) / Current Liabilities
  • Gross Profit Rate = Gross Profit / Net Sales
  • Earnings Per Share (EPS) = (Net Income – Preferred Dividends) / Weighted Average Common Shares Outstanding
  • Price-Earnings Ratio = Market Price per Share / EPS
  • Dividend Yield = Annual Cash Dividends per Share / Market Price per Share

Ratio Benchmarks

  • Current Ratio: Should be at least 1.0
  • Acid-Test Ratio: Should be at least 1.0 for good liquidity

Key Formulas

  • Net Sales = Sales – Sales Discounts – Sales Returns and Allowances
  • Gross Profit = Net Sales – Cost of Goods Sold
  • Income from Operations = Gross Profit – Operating Expenses
  • Straight-Line Depreciation = (Asset Cost – Salvage Value) / Useful Life
  • Book Value = Asset Cost – Accumulated Depreciation
  • Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Shares