It will become apparent to you that some of your professors are very brilliant, but their brilliance comes at a price that you are forced to pay. In some instances, these professors forget that they are teaching and they speak in terms that their students can not understand. This is unintentional on their part so you must be prepared to learn and understand the basic concepts that they gloss over.

Accrual vs. Deferral

You should already be aware of the difference between cash basis accounting and accrual basis accounting. You should also be aware of the different types of accounts to which you will be posting entries for either cash basis books or accrual basis books. (e.g. Cash, Accounts Receivable, Sales Revenue, Accounts Payable, Prepaid Rent, Deferred Sales Revenue.)

You will run into those times when you have to decide whether a revenue and/or expense is to be accrued or deferred. The first thing to remember is that accruals and deferrals are recorded with respect to when the associated cash flow occurs.

Revenue and expense accruals occur PRIOR to the associated cash flow.

Revenue and expense deferrals occur SUBSEQUENT to the associated cash flow.

ACD is a mnemonic device you can use to simplify the decision process in determining whether a revenue and/or expense should be entered as an accrual or a deferral. ACD are the initials for Accrual - Cash - Deferral. The order of the letters in ACD tells you whether or not a specific event should be recorded as an accrual or deferral. If you are recording a revenue and/or expense that occurred prior to the cash (C) flow, you have an accrual (A.) If you are recording a revenue and/or expense that occurred subsequent to the cash (C) flow, you have a deferral (D.)

The Accounting Equation

The accounting equation is Assets - Liabilities = Equity.

The important thing to remember about this equation is that equity is essentially a "ghost term" that is used to balance the equation. Unlike other arithmetic equations, such as 3 - 1 = X, for which you would have a reasonably good idea as to what the answer would be prior to solving it, the solution to the accounting equation can be somewhat elusive if you do not know when to stop looking.

For the beginning accounting student who has just been introduced to the idea of equity, assets and liabilities, there may be an issue for the student in that he does not readily grasp the concept that equity is, essentially, nothing more than the difference between assets and liabilities. This is similar to the time when the same student was introduced to simple arithmetic equations. While this student was taught the mechanics of additon and subtraction, this student had to learn to trust when he found the correct answer. When the student learns the accounting equation, he will learn the mechanics of finding equity but he will not have the same level of confidence in the answer that he has found.

The student needs to draw the following connection between the accounting equation and arithmetic equations. In referring to the arithmetic example above, the student most probably has an idea what the answer is prior to solving the problem. If the accounting student remembers, or has the idea, that equity is, essentially, nothing more than the difference between assets and liabilities, he will be able to solve the accounting equation in the same manner that he solves other arithmetic problems. He will have the necessary confidence and he will be able trust that he has found the correct answer.

ALORE: The Five Basic Types of Accounts

The five basic types of accounts that you will be required to use are assets, liabilities, owner's equity, revenues and expenses. There are other types of accounts, such as contra-asset accounts, gain accounts and loss accounts, but these latter three types are, essentially, variations of the five basic account types. (Please note that owner's equity can also refer to stockholder's equity, partner's equity, member's equity, etc. depending upon the legal organization of the business.)

ALORE is the acronym that you should memorize as it summarizes the five basic account types in their proper order. Proper order refers to how a balance sheet, chart of accounts, trial balance, general ledger, etc. are organized. In general, you will address assets first, liabilities second, owner's equity third and so on.

In one form or another, all accounting activity will ultimately be summarized into these five basic types of accounts.

Debits and Credits

The confusion surrounding these two terms most often comes from how you use debits and credits in your personal checkbook and how you use them in business bookkeeping.

The first thing to remember is the definition of each term. A debit is simply an entry on the left-hand side of the bookkeeping entry. A credit is simply an entry on the right-hand side of the bookkeeping entry.

When you record a deposit in your personal checkbook, you record it as a credit, but when you record a deposit in your business cash account, you record it as a debit. This difference in recording is what causes the confusion. While you are being correctly instructed to record increases in cash, better known as deposits, by using a debit in your business books, there is probably a little voice in the back of your mind wondering how this can be correct if you have always recorded deposits in your personal checkbook by using a credit.

If you are practicing debit and credit entries, you have been instructed that asset accounts, such as cash, are increased by debits and decreased by credits. You have also been instructed that liability accounts, such as accounts payable, are decreased by debits and increased by credits. Therefore, if you look at your personal checkbook as your bank's set of businees books, the confusion is eliminated. While banks hold your cash on deposit, it is a liability for them because they are responsible to you for your money. When your bank takes your deposit, they increase their cash account with a debit and your deposit account with a credit. That is, they increase the amount of their liability to you - the amount in your deposit account - with a credit.

For each individual bookkeeping entry, total debits MUST equal total credits. By extension, total debits must equal total credits for all bookkeeping entries. When you make an entry, you should enter the debit side first.

You will encounter many more accounting terms and concepts, but if you can learn and understand the above items, you will be well on your way to being able to understand all accounting concepts and terms.

* Italicized phrases are accounting terms to which you will be introduced if you have not been already.