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.