accounting-fundamentals

Accounting Fundamentals

The bookkeeping layer beneath every analyst deliverable. Required reading before financial-statement-analysis or financial-modeling.

When to use

• Building a small-entity P&L and Balance Sheet from raw transactions (no ERP)
• Reviewing a client's chart of accounts and journal entries for integrity
• Onboarding a junior analyst into CPS conventions
• Reconciling a trial balance that doesn't balance
• Translating informal Egyptian SME records (cash receipts books, ledgers) into accrual statements

Core principles (CPS standards)

1. The accounting equation always holds: Assets = Liabilities + Equity
2. Every transaction has at least two entries (double-entry); debits must equal credits
3. Accrual basis is the default — recognize revenue when earned, expenses when incurred, not when cash moves
4. Conservatism — when in doubt, defer revenue and recognize expense; never the reverse
5. Consistency — same policy applied across periods; disclose changes
6. Materiality — apply rigor proportional to value; document the threshold

Debit / Credit rules

Account type	Increases with	Decreases with	Normal balance
Assets	Debit	Credit	Debit
Liabilities	Credit	Debit	Credit
Equity	Credit	Debit	Credit
Revenue	Credit	Debit	Credit
Expenses	Debit	Credit	Debit

Mnemonic: DEAD CLIC — Debits increase Expenses, Assets, Drawings; Credits increase Liabilities, Income, Capital.

The bookkeeping cycle

1. Source document — invoice, receipt, bank statement
2. Journal entry — chronological record with debit/credit
3. Post to ledger — by account
4. Trial balance — list all account balances, verify debits = credits
5. Adjusting entries — accruals, deferrals, depreciation, prepayments
6. Adjusted trial balance
7. Financial statements — P&L → Retained Earnings → Balance Sheet → Cash Flow
8. Closing entries — zero out P&L accounts into Retained Earnings

Common journal entries

See references/common-journal-entries.md for the full catalog. Top patterns:

• Sale on credit: Dr. Accounts Receivable / Cr. Revenue
• Cash collection: Dr. Cash / Cr. Accounts Receivable
• Purchase on credit: Dr. Inventory or Expense / Cr. Accounts Payable
• Depreciation: Dr. Depreciation Expense / Cr. Accumulated Depreciation
• Accrued expense: Dr. Expense / Cr. Accrued Liability
• Prepaid expense recognition: Dr. Expense / Cr. Prepaid Expense
• Loan drawdown: Dr. Cash / Cr. Long-term Debt
• Interest accrual: Dr. Interest Expense / Cr. Interest Payable

Adjusting entries — the four types

Type	Cash timing	Revenue/Expense timing	Example
Accrued revenue	Cash later	Earned now	Service delivered, not yet invoiced
Accrued expense	Cash later	Incurred now	Utilities used, bill not received
Deferred revenue	Cash now	Earned later	Tuition received in advance
Deferred expense	Cash now	Incurred later	Insurance prepaid for 12 months

Plus: depreciation (allocating long-term asset cost) and bad debt provision (estimated uncollectible AR).

Trial balance — when it doesn't balance

Diagnose in this order:

1. Difference divisible by 9? → likely a transposition error (e.g. 540 entered as 450)
2. Difference divisible by 2? → likely a debit posted as credit or vice versa; divide by 2 to find the entry
3. Difference is a round number (100, 1000)? → likely a missed zero
4. Same as a single transaction value? → likely one entry posted only once

Egyptian context notes

• Egyptian Accounting Standards (EAS) broadly follow IFRS; key local divergences in EAS 47 (financial instruments) and EAS 49 (insurance — formerly EAS 37, now aligned with IFRS 17).
• VAT (14 % standard rate) is collected as a liability, not revenue; Dr. Cash / Cr. Revenue / Cr. VAT Payable.
• Cash-basis bookkeeping is common in Egyptian SMEs; CPS conversion to accrual requires an explicit reconciliation memo.
• Cheques are still widely used; post-dated cheques are recorded as AR/AP with disclosure of maturity.

CPS deliverable quality gate

• All journal entries have source-document reference (invoice #, receipt #, bank ref)
• Trial balance reconciles to zero
• Adjusting entries documented with rationale
• Accounting policy memo notes any cash-to-accrual conversions
• Sign convention consistent (debits positive, credits negative — or reverse, but stated)
• Egyptian VAT treatment explicit if applicable

See also

• references/double-entry-cheatsheet.md — one-page reference for analysts
• references/common-journal-entries.md — 30+ pattern entries with explanations
• plugins/finance/skills/financial-statement-analysis/SKILL.md — next layer up
• plugins/finance/skills/financial-modeling/SKILL.md — modeling layer