Clear my accounting course confusion

January 18, 2007 8:40 AM

I could use your help hive mind. I'm currently taking an accounting course in college, and I'm having difficulties with financial statements and what gets reported where. I'm looking a mnemonic system that can embed this into my brain, as well as tricks and formulas which can help simplify this for me.

More specifically, it's the income statement, the statement of owners equity and the balance sheet. I've been toiling on assigned homework for several days, but there has to be an easier way to figuring out a balance sheet. Your suggestions are appreciated.

posted by dropkick to education (6 comments total)

the only method I'm familiar with is to associate a visual image with a word in order to remember, like for income statement, visualize a (incoming) missle that makes a political statement.

either that, or do a sing-song. ;)
posted by emptyinside at 9:42 AM on January 18, 2007

I think you should focus on the conceptual difference between each set out accounts instead of trying to memorize each one. Rote memorization now will make things harder when you're doing journal entries and have to know whether accounts are increased with a debit or credit.

Balance Sheets accounts are snapshots at a given time. Cash, Equipment, and Interest Payable are all balances at a specific point in time.

Income Statements describe accumulated accounts throughout the reporting period (usually a year). Revenue and Expense accounts measure yearly totals, not current amounts.

Owners Equity contains both elements: Stock accounts are snapshots and Retained Earnings ties the income statement to the balance sheet. Since Owners Equity does not contain a single type of account (in addition to random-sounding accounts like Additional Paid In Capital), it might be worthwhile to memorize these accounts.

When you see an account you don't recognize, ask yourself whether it would be meaningful to get the balance of the account *right now*. Cash? Yes. Accounts payable? Yes. Gross Revenue? No, you'd need to know whether it was daily, yearly, etc. in order for the number to be meaningful.

When I need to memorize something, I do the following: take the first letter of each thing I need to know and make a sentence using those letters (eg, Kings play cards on fat green stools or Every good boy does fine). Then pull out a piece of paper and try to reproduce your list. Keep at it until you can quickly write out everything.

If you're having trouble with debits and credits I can give you an easy way to remember it, but it requires account identification.

I hope this helps.
posted by Hermes32 at 10:17 AM on January 18, 2007

This is where my confusion lies: I need to remember that things like rent earned goes under "revenues" in the income statement, but not included in the balance sheet (although it is an asset... that kinda thing), and what belongs in an owners equity statement yadayada. "Hep me".
posted by dropkick at 10:28 AM on January 18, 2007

It sounds like your confusion may stem from equating the account names with the underlying transaction. Remember that every transaction will include at least two accounts. Earning rent would be accounted for like this (assuming there's no receiveable account):

Cash (balance sheet)(debit) 1000
.......Rent Revenue (income statement)(credit) 1000

A "Rent Earned" account would be a revenue account, *not* an asset, even though the underlying transaction (earning rent) would involve cash.

Does that help?
posted by Hermes32 at 11:01 AM on January 18, 2007

Thanks for all the comments. You all rule in my book.
posted by dropkick at 6:59 PM on January 18, 2007

Unfortunately, there is not going to be a mnemonic (that any of us could recommend to you) because there are literally thousands of accounts that can make up the four main financial statements. So there is no telling which accounts your professor or text are using as the example accounts. Of course there are some accounts that most every company will have such as Cash, Retained Income, and Paid-In Equity/Common Stock, etc. If you have particular questions feel free to email me.
posted by iurodivii at 7:13 PM on January 18, 2007