Accounting is the record-keeping system behind every financial statement, and understanding it, even at a basic level, makes everything else in finance click into place faster. This deck starts from the actual mechanics: what double-entry bookkeeping means, how debits and credits work, and how the books get built up from a single transaction. It is written for someone who has never taken an accounting class, not as a shortcut around learning it, but as a clear first pass.
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Card 1 of 18
Someone tells you to go through a company’s books before the meeting. What are the books, literally?
The books are a set of accounts, each one a running tally of a single thing a company owns or owes.
When people say a company’s books they mean its accounting records, and the basic unit of those records is an account: a running tally of one specific thing, such as cash in the bank, inventory sitting in a warehouse, or money owed to a supplier. A midsize business might keep hundreds of them. The complete collection is called the general ledger, and every financial statement you will ever look at is built by totalling those accounts and arranging the results. So asking for the books means asking for the underlying tallies rather than the polished summary.
Card 2 of 18
Your staffer sketches Assets = Liabilities + Equity on a napkin and says all of accounting comes back to that one line. What does the equation actually say, and why can it never go out of balance?
Everything a company owns was funded either by money it borrowed or by money its owners put in.
Assets are everything the company owns that has value, like cash, buildings and inventory. Liabilities are what it owes to outsiders, mostly loans and unpaid bills. Equity is what would be left over for the owners if every asset were sold and every debt repaid. If Calder Foods raises $100,000 from its owners and borrows $400,000, it holds $500,000 of assets funded by $400,000 of liabilities and $100,000 of equity. The equation holds by construction: the left side lists what the company has, the right side lists where every dollar of it came from.
Card 3 of 18
A founder tells you her company did $40 million last year. Your MD wants to know whether that’s revenue or profit before anyone starts a model. What’s the difference?
Revenue is what customers paid you, profit is what is left after every cost of earning it.
Revenue, also called sales or the top line, is the total amount customers were charged for goods and services during the period. Profit is what survives after subtracting costs: first the direct cost of the things sold, then salaries, rent, marketing, interest on any debt, and tax. A company with $40 million of revenue and $39 million of costs earned $1 million, while a smaller company with $12 million of revenue and $6 million of costs earned far more. Interviewers press on this because anyone who treats the two words as interchangeable will misread every income statement they touch.
Card 4 of 18
What do “debit” and “credit” actually mean in accounting?
Debit means left, credit means right — which one grows an account depends on the account type.
Debit and credit aren't inherently "increase" or "decrease" — they just mean the left and right side of an account. What each one does depends on the account type: debits increase assets and expenses (and decrease liabilities, equity, and revenue), while credits increase liabilities, equity, and revenue (and decrease assets and expenses). Memorize which accounts move which way, and the rest of double-entry bookkeeping follows from that.
Card 5 of 18
What is double-entry bookkeeping?
Every transaction hits two accounts of equal value, so the books always stay in balance.
Every transaction gets recorded twice, once as a debit and once as a credit, always for the same amount. That's what keeps the accounting equation, Assets = Liabilities + Equity, in balance no matter how many transactions pile up. It also builds in a natural error check: if total debits and credits ever stop matching, you know something was recorded wrong somewhere — the same logic that has to hold in every model you'll ever build off a company's books.
Card 6 of 18
What is the difference between a journal entry and the general ledger?
Journal entries record transactions in order; the ledger re-sorts them by account.
A journal entry is the raw, chronological record of a transaction: it shows exactly which accounts were debited and credited as the transaction happened. The general ledger then reorganizes those entries by account, pulling every transaction that touched "Cash" or "Revenue," for example, into one place so you can track that account's running balance. Think of the journal as the diary and the ledger as the filing system built from it — the distinction that matters when you're handed a target's books and need to trace a number back to the transaction that created it.
Card 7 of 18
Northbay Logistics pays $30,000 in cash for a forklift. Write the journal entry on the whiteboard for me: what are the two lines, and how do you know which side each account goes on?
Debit what the company gains, credit what it gives up, and the two amounts have to match.
Two lines. Debit Equipment for $30,000, because equipment is an asset and debits increase assets, then credit Cash for $30,000, because cash is also an asset and credits decrease it. The company is no richer or poorer than it was that morning, one asset simply turned into another, which is why the accounting equation still balances. Had Northbay bought the forklift on credit instead, the second line would be a $30,000 credit to accounts payable, the liability that tracks bills owed to suppliers, and both assets and liabilities would rise together.
Card 8 of 18
Ferrow Retail ships $2 million of goods in December and collects the cash in February. Which year does that sale belong to, and why is accrual accounting the standard rather than simply tracking cash?
Accrual books revenue when it is earned and costs when they are incurred, not when cash moves.
December, because accrual accounting records revenue once the company has actually done the work and delivered the goods, and records the costs of earning that revenue in the same period, a rule known as the matching principle. Cash accounting instead records everything only when money changes hands, which is simpler but lets one slow-paying customer swing a whole year of reported profit. Accrual gives a truer picture of how a period really went, which is why it is the standard basis under both IFRS and US GAAP, and it is also what creates the gaps between profit and cash that the cash flow statement exists to explain.
Card 9 of 18
What are accounts receivable and accounts payable, and why does almost every real business have both sitting on its balance sheet?
Receivables are sales you have not been paid for, payables are bills you have not paid yet.
Accounts receivable is money customers owe for goods or services already delivered, so it sits on the balance sheet as an asset, a claim on cash that has not arrived yet. Accounts payable is the mirror image, bills from suppliers that have been received but not yet settled, recorded as a liability. Both exist because accrual accounting books the sale or the cost when the work happens while the cash follows weeks later. Comparing how fast those two balances turn over is one of the quickest ways to see whether a business collects from its customers sooner than it pays its own suppliers.
Card 10 of 18
A software company you’re diligencing collects a full year of subscription fees every January. Why can’t it record all of that as revenue in January, and what appears on the balance sheet instead?
Cash collected before the work is done is a liability, not revenue, until you actually deliver.
Because it has the cash but has not earned it yet. If a customer pays $12,000 in January for twelve months of service, the company recognizes $1,000 of revenue in January and parks the other $11,000 as deferred revenue, a liability representing service it still owes, releasing $1,000 into revenue each month as it delivers. Deferred revenue is the rare liability you like to see growing, since it means customers are paying ahead of the work. It is also why a subscription business can be sitting on a pile of cash long before that cash has become profit.
Card 11 of 18
You're on the deal team for Kessler Industrial's sale process, and the seller's controller hands your group Q3 financials that haven't been closed out yet. Before the numbers go into the model, your VP wants to know: what is an adjusting entry, and why is it needed at the end of a period?
Adjusting entries true up the books so revenue and expenses land in the right period.
An adjusting entry updates account balances at the end of a period to capture revenue that's been earned, or an expense that's been incurred, but hasn't been recorded yet — think accrued interest, or a prepaid expense that's now been used up. They're needed because plenty of transactions span multiple periods, and without them, revenue and expenses would land in the wrong period and distort the financial statements. In a deal context that's not academic: financials handed over mid-period, like the ones Kessler's controller just sent, need these entries booked before you can trust them enough to build a model on top of.
Card 12 of 18
You're building the base-case LBO model for the Thornfield Manufacturing deal, and your associate wants a simple capex and depreciation schedule rather than something modeled asset-by-asset. What is depreciation, and why is straight-line depreciation the simplest method?
Depreciation spreads an asset's cost over its useful life instead of expensing it all at once.
Depreciation spreads the cost of a long-term asset, like equipment or a building, across its useful life instead of expensing the full purchase price the year it's bought, matching the expense to the years the asset actually helps generate revenue. Straight-line depreciation is the simplest version: it expenses an equal amount every year, which makes it easy to calculate and forecast, even though many assets really lose value faster in their early years than a straight line implies. That simplicity is exactly why it's the default assumption in a base-case model unless there's a specific reason to build something more granular.
Card 13 of 18
Your model has one line for depreciation and another for amortization. What’s the difference between them, and does either one actually move cash out the door?
Same idea, different assets: depreciation covers physical ones, amortization covers intangible ones.
Mechanically they are the same move, taking the cost of something the company bought and spreading it across the years it stays useful rather than expensing it all at once. Depreciation applies to tangible assets you can physically touch, such as machinery, vehicles and buildings. Amortization applies to intangible assets, things with no physical form like a patent, a software license or a customer list picked up in an acquisition. Neither one moves cash: the money left when the asset was bought, so both are non-cash expenses that reduce reported profit in years when nothing is actually paid, which is why both get added back on the cash flow statement.
Card 14 of 18
Northbay Logistics is profitable every quarter but keeps running short of cash, and your VP tells you to look at working capital first. What is working capital, and what would it tell you here?
Working capital is short-term assets minus short-term bills, the cash locked up running the business.
Working capital is current assets minus current liabilities, where current means expected to turn into cash, or fall due, within a year. On the asset side that is mostly cash, receivables and inventory, the goods a company is holding to sell. On the liability side it is mostly payables and other bills coming due shortly. A profitable company can still be starved of cash if too much of its money is sitting in unsold inventory and uncollected receivables. Keep one distinction straight, because interviewers test it: that is the accounting definition. When a banker models working capital they normally mean operating, or net, working capital, which deliberately excludes cash and any short-term debt, since those are financing items rather than part of running the business. Measured that way, the figure isolates the cash that growth actually eats.
Card 15 of 18
Calder Foods buys a rival for $500 million when the rival’s identifiable net assets are worth $320 million at fair value. Where do the extra $180 million go on the balance sheet?
Goodwill is the premium a buyer pays above the fair value of what the target actually owns.
They become goodwill, an intangible asset that only exists because one company bought another. The buyer first restates the target’s identifiable assets and liabilities at fair value, meaning what they would fetch today rather than whatever the old books said, and anything the purchase price exceeds that net figure becomes goodwill, $180 million in this case. Be careful about what actually sits inside that residual. Identifiable intangibles belong in the $320 million, not in the goodwill: under IFRS 3, and equally under US GAAP’s ASC 805, things like brand names and customer relationships are recognised separately whenever they are separable or arise from contractual or legal rights. What is left in goodwill is the genuinely unmeasurable part, an assembled workforce and expected synergies, neither of which can be recognised on its own. Goodwill is not amortized on a schedule, it is tested at least annually for impairment and written down if the deal proves worth less than what was paid.
Card 16 of 18
Your team is comparing Ferrow Retail against a public comp for a pitch book, and Ferrow uses LIFO while the comp uses FIFO. Before the margins can be compared apples-to-apples, your VP wants a quick explanation: what’s the difference between FIFO and LIFO inventory valuation?
FIFO sells your oldest inventory first; LIFO sells the newest — and rising prices make the choice matter.
FIFO (first in, first out) assumes the oldest units in inventory get sold first, so cost of goods sold reflects older, typically cheaper, costs. LIFO (last in, first out) assumes the newest units get sold first, so cost of goods sold reflects more recent, typically higher, costs. When prices are rising, that difference shows up on the financials: FIFO tends to report higher profit and a higher inventory value, while LIFO reports lower profit but a smaller tax bill. That’s exactly why you can’t line up Ferrow’s margins against a FIFO comp without adjusting for the accounting difference first. One point that matters the moment you look outside the US: LIFO is a US GAAP concept and is not permitted under IFRS at all. IAS 2 allows FIFO or weighted average cost for inventories that are ordinarily interchangeable, so if a comp is on LIFO, it is a US filer.
Card 17 of 18
During diligence on the Halstead Foods acquisition, you notice the target capitalized a cost that arguably should have been expensed, flattering reported EBITDA. Before flagging it to your MD, make sure you can explain: what is the difference between capitalizing a cost and expensing it?
Capitalize a cost if its value lasts years; expense it if the benefit ends this period.
Capitalizing a cost means recording it as an asset on the balance sheet and spreading it over time through depreciation or amortization, because it creates value beyond the current period — buying equipment, for instance. Expensing a cost means recording the full amount immediately on the income statement, because the benefit is used up in the current period, like office supplies. The choice affects both the balance sheet and how quickly a cost hits reported profit — and it's a classic spot for quality-of-earnings adjustments in diligence, since capitalizing a cost that should have been expensed makes near-term EBITDA look better than it really is.
Card 18 of 18
Two competitors run nearly identical operations and report clearly different net income, and neither has done anything wrong. Your MD asks how that’s possible. What do you tell her?
Accounting rules leave real choices, so two honest companies can report different profits.
Because the rules leave room for judgement. One might use FIFO while the other uses weighted average cost (or LIFO, if it is a US GAAP filer), so identical rising input costs land in cost of goods sold differently. One might depreciate the same machine over ten years and the other over seven, changing the annual expense on identical equipment. One might capitalize a software build the other expenses outright. None of that is fraud, it is policy choice, which is why analysts spend so long normalizing financials before comparing two companies, and why this question is really testing whether you understand that reported profit is an opinion built on assumptions while cash is much closer to a fact.
Reading is not the same as remembering. Study this deck with scheduled review so the cards come back before you forget them.