Accounting 101

Kid Mode: Accounting With a Lemonade Stand

Teach it like you're 10: simple words, clear steps, real examples

Imagine you run a lemonade stand called Sunny Sips. Accounting is just your way of keeping score so you always know if your stand is healthy.

Cartoon memory trick: What you own goes in the green jar, what you owe goes in the red jar, and what is truly yours goes in the blue jar.

Big Words in Kid Words

The 3 Book System (Most Important!)

Beginners mix these up. Keep this mental picture: labels, then diary, then folders.

How One Sale Moves Through Accounting

Mini Story: 5 Days at Sunny Sips

Follow this like a cartoon timeline. Notice every event touches at least two accounts.

Kid Checks (Try Before Seeing Answers)

Think first, then open each answer.

Interactive Builder: Make the Entry

Pick a scenario and build the journal entry yourself. Choose the debit account, credit account, and amount.

1. Introduction to Accounting

What it is, who uses it, and the two main branches

Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual. It produces information that helps stakeholders make informed decisions.

Two Main Branches

Key Principles (GAAP)

In the United States, accounting follows Generally Accepted Accounting Principles (GAAP), issued by the Financial Accounting Standards Board (FASB). Key principles include:

• Entity principle — business finances separate from shareholders' personal finances
• Going concern — assume the business will continue indefinitely
• Cost principle — record assets at their original purchase cost
• Revenue recognition — record revenue when it is earned, not when cash is received
• Matching principle — record expenses in the same period as the revenue they helped generate
• Conservatism — when in doubt, record losses early, gains only when certain

Practice Questions

2. The Accounting Equation

The foundation of all of accounting

Every transaction in accounting is built on one fundamental equation:

This equation must always stay balanced. Every single transaction affects at least two accounts but the equation never breaks — this is called double-entry accounting.

What each term means

Expanded Accounting Equation

For corporations, retained earnings changes each period by: + Revenue − Expenses − Dividends.

Example transactions

Practice Questions

3. Types of Accounts

The five money buckets every beginner should know

Every transaction goes into one or more account buckets. If you can identify the right bucket, accounting becomes much easier.

Bucket Map (simple view)

Quick Sorting Practice

Try to name each bucket before checking the answer in your head.

Current vs. Long-Term (kid words)

Assets and liabilities are also grouped by timing: soon (within a year) or later (more than a year).

Practice Questions

4. Debits & Credits

The rule system that makes double-entry accounting work

Debits and credits are the mechanics of accounting. They are not "good" or "bad" and they are not the same as "money in" and "money out." They simply indicate whether an amount is recorded on the left side (debit) or right side (credit) of an account.

Normal Balance Pattern (DEALER)

Use the memory aid DEALER: Dividends, Expenses, Assets have normal Debit balances; Liabilities, Equity, Revenue have normal Credit balances.

How to Decide Debits and Credits in 4 Steps

Transaction Walkthroughs

T-Account Visualizer

T-accounts help you see running debits and credits by account.

Practice Questions

5. Chart of Accounts

Your business's master list of all accounts — like a menu for recording transactions

Before you can record any transaction, you need a Chart of Accounts (COA) — a numbered directory of every account your business uses. Think of it like the contacts list on your phone: it organizes everyone (every account) in one place so you can find them fast.

How accounts are numbered

Accounts are grouped by type and given a number range. This makes it easy to know what type of account you're looking at just from its number:

Note: numbering systems vary by company. The ranges above are a common convention, not a law.

Example: Small Business Chart of Accounts

Practice Questions

6. General Journal

The chronological record where every transaction is first written down

What is a Journal Entry?

A journal entry is the first formal record of a financial transaction. Every time something financial happens — a sale, a payment, a purchase — you capture it as a journal entry before anything else. It uses the debit/credit system and must always balance: total debits must equal total credits.

What is the General Journal?

The General Journal is the book (or digital log) that holds all journal entries in chronological order. It is the starting point of the accounting process — every transaction enters the system here first, then gets posted to the General Ledger.

Standard Journal Entry Format

Every journal entry has four parts: date, account names (debit first, credit indented), amounts, and a short narration explaining the transaction.

Common Journal Entry Examples

Compound Journal Entry

When a transaction affects more than two accounts, it is called a compound entry. Debits still must equal credits.

From Journal to Ledger

Once a journal entry is recorded, each line is posted to the corresponding account in the General Ledger. This is how account balances stay current.

Practice Questions

7. The General Ledger

Your business's master scoreboard — one running score for every account

What is the General Ledger?

The General Ledger is the master record of your business. After every journal entry is written, each line gets copied ("posted") into the General Ledger, which keeps a separate running balance for every account — Cash, Rent Expense, Service Revenue, and so on.

What does "Posting" mean?

Posting is just the act of copying a journal entry's debit and credit amounts into the correct accounts in the General Ledger. Nothing changes — you're just moving the same information from date order into account order.

The T-Account — the Ledger's building block

Each account in the General Ledger is shown as a T-account — shaped like the letter T. The left side holds debits, the right side holds credits. The difference between the two sides is the account's balance.

Step-by-step: Posting a real example

Lemonade Stand Co. has three transactions in June. Here's how they move from the General Journal into the General Ledger.

Step 1 — The General Journal (date order):

Step 2 — The General Ledger (account order):

Each journal entry line goes to its matching account. Cash appeared three times — all three land in the Cash T-account.

Why does the General Ledger matter?

From Ledger to Trial Balance

Once all transactions are posted, you list every account's balance in a Trial Balance. If the total of all debit balances equals the total of all credit balances, your books are correct and ready for financial statements.

Practice Questions

8. Financial Statements

The Core Four - beginner version of the full reporting set

A complete beginner-friendly set includes four statements, not three. The Statement of Stockholders' Equity is also part of the core package.

What each statement answers

Statement 1: Income Statement (Profit & Loss)

Shows revenues minus expenses over the period. The result is net income (profit) or net loss.

Statement 2: Statement of Stockholders' Equity

Explains how equity changed during the period using beginning equity, plus net income, minus dividends, plus/minus stock transactions.

Statement 3: Balance Sheet

A snapshot at one date. It must balance: Assets = Liabilities + Equity.

Statement 4: Statement of Cash Flows

Shows how cash moved during the period. It is split into three activities:

How the four statements connect

Practice Questions

9. Adjusting Entries (Accruals and Deferrals)

Period-end updates so revenue and expense are recorded in the correct month

Adjusting entries are made at the end of the period to match accounting records with economic reality. They are required under accrual accounting and the matching principle.

Four common adjusting entry types

Mini example: one month of prepaid insurance used

You paid $1,200 for a 12-month policy. At month-end, one month is used ($100).

Effect: expense goes up (net income down), prepaid asset goes down, and the period reports are more accurate.

Practice Questions

10. Revenue Recognition vs Cash Collection

Revenue is recognized when earned, not when cash arrives

In accrual accounting, the timing of cash and the timing of revenue can be different. The key question is: Has the service/product been delivered?

Timing map

Two fast journal examples

Practice Questions

11. Depreciation and Amortization

Spread long-term asset cost across useful life

Depreciation (for tangible assets) and amortization (for intangible assets) allocate cost over time instead of expensing everything on purchase day.

Depreciation vs amortization

Straight-line depreciation example

Machine cost = $12,000, salvage value = $2,000, useful life = 5 years.

Year-end entry: Dr Depreciation Expense 2,000 and Cr Accumulated Depreciation 2,000.

Practice Questions

12. Financial Ratio Basics

Simple ratios that help beginners read statements faster

Ratios turn big financial statements into quick signals. They help answer: liquidity, profitability, and risk.

Starter ratio set

Quick worked example

If current assets are $50,000 and current liabilities are $25,000:

Simple read: the business has $2 of current assets for each $1 of short-term obligations.

Practice Questions

Knowledge Check

Test your understanding of accounting basics — 15 questions

Glossary of Key Terms

Quick-reference definitions for accounting vocabulary

Accounts Payable (AP)

Amounts a company owes to suppliers for goods/services received but not yet paid for.

Accounts Receivable (AR)

Amounts customers owe to the company for goods/services delivered but not yet paid for.

Accrual Accounting

Recording revenues when earned and expenses when incurred, regardless of cash flow.

Adjusting Entries

Journal entries made at period-end to ensure revenues and expenses are recorded in the correct period.

Amortization

The systematic allocation of an intangible asset's cost over its useful life.

Assets

Resources owned or controlled by a company that have future economic value.

Balance Sheet

Financial statement showing assets, liabilities, and equity at a specific date.

Cost of Goods Sold (COGS)

The direct cost of inventory items that were sold during the period.

Chart of Accounts

A numbered list of all accounts used by a company, organized by category.

Closing Entries

Entries that zero out temporary accounts (revenues, expenses) and transfer balances to Retained Earnings.

Credit (Cr)

An entry on the right side of a T-account. Increases liabilities, equity, and revenue; decreases assets and expenses.

Current Ratio

Current Assets divided by Current Liabilities; indicates short-term liquidity strength.

Debit (Dr)

An entry on the left side of a T-account. Increases assets and expenses; decreases liabilities, equity, and revenue.

Debt-to-Equity Ratio

Total Liabilities divided by Stockholders' Equity; shows leverage and financing risk.

Depreciation

The systematic allocation of a long-term asset's cost over its useful life.

Double-Entry Accounting

Every transaction affects at least two accounts; total debits always equal total credits.

Equity

The shareholders' residual interest in assets after subtracting liabilities (net assets).

Expense

The cost of resources consumed to generate revenue during a period.

GAAP

Generally Accepted Accounting Principles — the standard framework for financial reporting in the US.

General Journal

The book of original entry where all transactions are first recorded chronologically.

General Ledger

The master record containing all account balances, organized by account type.

Gross Margin

(Sales minus COGS) divided by Sales; shows profitability before operating expenses.

Income Statement

Financial statement showing revenues, expenses, and net income over a time period.

Journal Entry

A record of a financial transaction showing accounts debited and credited.

Liabilities

Obligations or debts a company owes to external parties.

Matching Principle

Expenses should be recorded in the same period as the revenues they helped generate.

Net Income

Total revenues minus total expenses for a period; the "bottom line."

Net Profit Margin

Net Income divided by Sales; indicates how much profit is kept from each sales dollar.

Notes Payable

A written promise to repay a loan, typically with interest, by a specific date.

Retained Earnings

Cumulative net income kept in the business after dividends are paid.

Revenue

Income earned from selling goods or providing services during a period.

Statement of Cash Flows

Financial statement that explains cash inflows and outflows from operating, investing, and financing activities.

Statement of Stockholders' Equity

Financial statement that explains changes in equity during the period (beginning equity, net income, stock transactions, dividends).

T-Account

A visual tool shaped like the letter T used to show debit and credit entries for an account.

Trial Balance

A list of all general ledger accounts and their balances, used to verify debits = credits.

Unearned Revenue

Cash received before the related service is performed; a liability until earned.

Working Capital

Current Assets minus Current Liabilities; measures short-term liquidity.

Kid Glossary (Super Simple)

Same ideas, very simple words: