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POA Study Guide

The Principles of Accounts (POA) Study Guide outlines essential accounting concepts, including definitions of key terms such as assets, liabilities, and capital. It details the structure of financial statements like the classified balance sheet and income statement, as well as the processes for recording transactions in journals and ledgers. Additionally, it covers depreciation methods, ratio analysis, and the importance of financial statements in assessing business performance.

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0 views3 pages

POA Study Guide

The Principles of Accounts (POA) Study Guide outlines essential accounting concepts, including definitions of key terms such as assets, liabilities, and capital. It details the structure of financial statements like the classified balance sheet and income statement, as well as the processes for recording transactions in journals and ledgers. Additionally, it covers depreciation methods, ratio analysis, and the importance of financial statements in assessing business performance.

Uploaded by

sahoykimberly
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Principles of Accounts (POA) Study Guide

1. BASIC DEFINITIONS (Know These Cold!)

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Accounting: Recording, summarizing, and reporting financial transactions.

Asset: Anything owned by the business (e.g. cash, equipment).

Liability: Debts owed by the business (e.g. loans, creditors).

Capital: Owner's investment in the business.

Revenue: Income earned from business operations.

Expense: Costs to run the business (e.g. rent, salaries).

Profit: Revenue - Expenses.

Loss: When Expenses > Revenue.

Drawings: Cash or items withdrawn by the owner.

Dr (Debit): Left side entry (usually for assets and expenses).

Cr (Credit): Right side entry (usually for liabilities, revenue, capital).

Journal: Book of original entry.

Ledger: Book containing individual accounts.

Trial Balance: List of all accounts to check if Dr = Cr.

Financial Statements: Reports like Income Statement and Balance Sheet.

2. CLASSIFIED BALANCE SHEET

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Purpose: Shows financial position (Assets = Liabilities + Capital)

Structure:

- Current Assets: Cash, inventory, receivables

- Non-Current Assets: Land, buildings, vehicles


- Current Liabilities: Creditors, overdraft, short-term loans

- Non-Current Liabilities: Long-term loans, mortgages

- Capital Section: Opening capital + profit - drawings

3. BOOKS OF ORIGINAL ENTRY

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Sales Journal: Records credit sales

Purchases Journal: Records credit purchases

Returns Inward Journal: Goods returned by customers

Returns Outward Journal: Goods returned to suppliers

Cash Book: Records all cash and bank transactions

General Journal: Records non-regular entries like depreciation

4. LEDGERS & TRIAL BALANCE

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Ledgers: Organized accounts (e.g. Cash a/c, Capital a/c)

Posting: Transferring from books of original entry to ledger

Trial Balance: Ensures total debits = total credits

5. PREPARATION & ANALYSIS OF FINANCIAL STATEMENTS

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Income Statement (Trading & Profit and Loss Account):

- Sales - Sales Returns

- Less: Cost of Goods Sold = Gross Profit

- Gross Profit - Expenses = Net Profit

Balance Sheet:
- Lists Assets, Liabilities, and Capital

6. DEPRECIATION

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Definition: Decrease in value of a fixed asset over time.

Methods:

- Straight-Line = (Cost - Scrap Value) ÷ Useful Life

- Reducing Balance = Higher depreciation early on

Effect:

- Depreciation = Expense (Dr Profit & Loss)

- Accumulated depreciation = Contra-Asset

7. RATIO ANALYSIS

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Current Ratio = Current Assets ÷ Current Liabilities

Gross Profit Margin = Gross Profit ÷ Sales × 100

Net Profit Margin = Net Profit ÷ Sales × 100

Return on Capital Employed = Net Profit ÷ Capital × 100

Inventory Turnover = Cost of Sales ÷ Avg Inventory

8. INCOME STATEMENT (Deep Dive)

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Shows profit or loss over a period.

Used to: Calculate taxes, analyze performance, compare with past years.

Revenues include: Sales, Rent Income, Commission Earned

Common Expenses: Wages, Rent, Electricity, Depreciation

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