Accounting: free practice, theory and problems

1. Income statement and balance sheet

What is it about?

The accounts tell you how things went. The income statement shows revenue and expenses over a period. The balance sheet shows what the company owns and owes on one day.

Concepts and formulas

• Profit: $\text{revenue} - \text{expenses} = \text{net income}$.
• Balance sheet: $\text{assets} = \text{equity} + \text{liabilities}$. It always balances.
• Assets: non-current (machines, buildings) and current (inventory, receivables, bank).
• Liabilities: long-term (loans) and short-term (payables, VAT owed).
• Double-entry bookkeeping: every transaction is posted to two accounts, one debit and one credit, with the same amount.
• Assets and expenses increase on the debit side. Liabilities, equity and revenue increase on the credit side.

Example

The company buys goods for 10,000 NOK in cash: inventory (debit) +10,000, bank (credit) −10,000. The balance sheet still balances.

Practise income statement and balance sheet in the app →

2. Depreciation

What is it about?

A machine that lasts five years should not charge the full price to the accounts in the first year. The cost is spread over its life with depreciation.

Concepts and formulas

• Straight-line depreciation: the same amount each year. $\text{annual depreciation} = \dfrac{\text{cost} - \text{residual value}}{\text{useful life}}$.
• Declining balance (tax): a fixed percentage of the remaining value each year. Value after $n$ years: $K(1 - p)^n$.
• Book value = cost minus accumulated depreciation.
• Depreciation is an expense that reduces profit (and tax), but it is not a payment.

Example

Machine 500,000 NOK, residual value 50,000 NOK, life 5 years. Straight line: $\dfrac{450\,000}{5} = 90\,000$ NOK per year.

Practise depreciation in the app →

3. Key ratios and analysis

What is it about?

Key ratios make it possible to compare companies of different sizes. They show profitability, liquidity and solvency.

Concepts and formulas

• Operating margin: $\dfrac{\text{operating profit}}{\text{sales revenue}} \cdot 100\,\%$.
• Return on assets: $\dfrac{\text{operating profit} + \text{financial income}}{\text{total assets}} \cdot 100\,\%$.
• Return on equity: $\dfrac{\text{profit before tax}}{\text{equity}} \cdot 100\,\%$.
• Current ratio: $\dfrac{\text{current assets}}{\text{current liabilities}}$. Rule of thumb: above 2.
• Equity ratio (solvency): $\dfrac{\text{equity}}{\text{total assets}} \cdot 100\,\%$.

Practise key ratios and analysis in the app →

4. Value added tax

What is it about?

Value added tax (VAT) is a tax on consumption. The company collects it from customers and passes it on to the state, but deducts the VAT it has paid on its own purchases.

Concepts and formulas

• Rates in Norway: 25 % (standard), 15 % (food and drink), 12 % (passenger transport, hotels, cinema).
• From price excl. VAT to incl. VAT: multiply by $1.25$ (at 25 %).
• From incl. VAT to excl. VAT: divide by $1.25$. The VAT in a price incl. VAT is $\text{price} \cdot \dfrac{25}{125} = \dfrac{\text{price}}{5}$.
• Output VAT: on sales. Input VAT: on purchases. To pay: $\text{output} - \text{input}$.

Example

An item costs 1250 NOK incl. VAT. Excl. VAT: $1250/1.25 = 1000$ NOK. The VAT is 250 NOK.

Practise value added tax in the app →