Accounting Principles Course Exams are Tough!
10 Tips to Increase Your Exam Grade
Accounting Principles, Part I*
1. Start studying and preparing for the exam from day one.
2. Focus on course learning objectives.
3. Know the exam format.
4. Closely review class notes, quizzes, activities, and slides.
5. Thoroughly understand debit/credit rules and related T-account increase/decrease rules.
6. Master the accounting cycle, step by step.
7. Master the purpose and relationship of financial statements.
8. Know the basics of accounting for inventory and related expense.
9. Study the textbook lingo/jargon.
10. Relax, knowing you are prepared!
* While accounting principles courses generally encompass two separate courses, many of these accounting principles, part 1, exam tips apply to both.
1. Start studying and preparing for the exam from day one. Read the following tips at the beginning of your accounting principles course and use these tips during each class leading up to the exam…A few days of cramming just doesn’t work well in accounting courses. Your accounting class studying and homework will likely take more time than you expect, start early. For motivation, try spending some study time with a class friend or teammate; “explaining” what you know will greatly reinforce your learning/understanding. Finally, accounting is learned by doing, the more you do/study (accounting problems, preparing trial balances, financial statements, etc.), the better you’ll do on your accounting exams…reading the text and working few problems is not enough to master accounting concepts—do the assigned homework plus a couple extra textbook problems.
2. Focus on course learning objectives. Most courses have specific learning objectives by week/class. For non-standardized courses/exams, course instructors develop these learning objectives. Accordingly, it makes sense that exams prepared by an instructor will follow their learning objectives (if the instructor thought the particular learning objective was important, they will likely think a related test question is equally important). When you have standardized tests, used where I teach, course learning objectives may also be standardized. And, while the learning objective to test question correlation may not be as strong, the same concept basically applies—focus your study time on weekly learning objectives.
3. Know the exam format. It’s likely your accounting exams will be varied from simple definition type questions to having to analyze a trial balance and determine changes in retained earnings based on closing journal entries. Studying for definition type questions is obviously different from studying for analysis type question where you’ll need a deeper understanding of the material. Ask the instructor for example questions. In some cases, like where I teach, there may be practice exams available. Obtain these exams and practice; don’t be caught off guard by the type/format of test questions (you don’t need the added stress).
4. Closely review class notes, quizzes, activities, and slides. Again, your instructor thought this classroom material was important, and they will likely build exams closely tied to these materials.
5. Thoroughly understand debit/credit rules and related T-account increase/decrease rules. This sounds simple, but to ace accounting principles exams, you must get to the point where if someone asks you “what increases an expense account (debit or credit)?”…debit needs to instantly roll off your tongue…you don’t have time on the exam to give this much thought. Further, if you’re struggling with these basic rules, many other related questions will be equally difficult/misunderstood. Remember 2 rules: (1) debits on left and credits on right, period, end of story! (2) Debits increase asset, expense and dividend accounts; and decrease liability, capital stock, retained earnings, and revenue accounts. A one-page accounting equation guide is available at download tools; this guide will help you master these concepts.
6. Master the accounting cycle, step by step. We tend to compartmentalize information and topics as we progress through learning the various components of the accounting cycle, from journalizing, to creating a trial balance, to assembling financial statements. For example, you may clearly know from studying definitions that revenues increase owner’s equity, or supplies used during the accounting period decrease assets and increase expenses. However, you need to completely understand how these individual accounting cycle components come together to assemble trial balances, financial statements and so on. For example, if the question is asked how does revenue increase owner’s equity?… “closing journal entries” should immediately come to mind. A high-level knowledge of the accounting cycle and steps will certainly increase your exam score. Study and re-study the following accounting cycle steps. (1) Prepare journal entries—general journal entries (JEs) made during the accounting period. (2) Post JEs in step 1 to corresponding general ledger T accounts. (3) Prepare an initial trial balance, a simple listing of each T-account in step 2 and associated debit or credit balance. (4) Prepare adjusting JEs at the end of the accounting period (understand the difference between step 1 and 4 JEs); recall adjusting entries are needed to record account (revenues, expenses, assets, and liabilities) activity not captured in step 1 JEs. (5) Post JEs in step 4 to corresponding general ledger T accounts (add to debits and credits posted in step 2). (6) Prepare an adjusted trial balance, an updated listing of each T-account in step 5 and associated debit or credit balance. (7) Prepare financial statements from the adjusted trial balance. (8) Prepare the four closing JEs to close temporary accounts (revenues, expenses, and dividends) to retained earnings or owner’s equity (understand why closing entries are needed). (9) Prepare a post closing trial balance, a listing of each permanent (balance sheet) T-account and associated debit or credit balance. An accounting cycle tool is available at download tools to help understand and remember these steps.
7. Master the purpose and relationship of financial statements. Detailed financial statements may seem a little overwhelming at first. However, if you try to remember the statements in their simplest form and focus what each statement is communicating (purpose), the task at hand becomes easier. Remember, the financial statements are used to communicate information about each of the expanded accounting equation elements (i.e., Assets, Liabilities, Capital Stock, Retained Earnings, Revenues, Expenses, and Dividends). Each of these accounting equation elements has a home in one of the 3 primary financial statements. Study until you have a deep understanding of the following 3 statements. The 1st financial statement, the Income Statement, summarizes Revenue and Expense T accounts (simple form: R – E = NI), and communicates company profitability…when you hear “Income Statement”, “R” – “E” should instantly come to mind. Profit amount (NI) is then used to prepare the 2nd Statement, Retained Earnings Statement. The RE statement communicates changes in the RE T account. Remember, the RE T account is increased by revenues and decreased by expenses (or increased by NI). RE account is also decreased by distributions of profit (dividends or D). Accordingly, the RE statement is summarized as Beginning RE or (BRE) + NI – D = ending RE (ERE). ERE is used to complete the 3rd statement, the Balance Sheet (A = L + OE). The BS communicates what a company owns (listing of asset t accounts) and who has claims to those assets: Creditor claims, a listing of liability t accounts, + Owner claims, a listing Capital Stock and RE t accounts. Keep it simple… Income statement: R - E = NI. RE Statement: BRE + NI – D = ERE. Bal Sheet: A (List accounts) = L (List accounts) + OE (List accounts). The one-page accounting equation guide at download tools will build your financial statement and financial statement relationship understanding.
8. Know the basics of accounting for inventory and related expense. The first few weeks of accounting principles courses focus on service companies (companies that sell services, such as an attorney or accountant). From there, the course progresses to companies that manufacture or sell merchandise/inventory. Why? It’s easier to explain the accounting equation, debits/credits, and the various accounts when inventory is not a factor/used. A few inventory concepts will likely be part of your accounting principles exam. Three issues to focus on: (1) You must know the cost of goods sold (COGS) formula: beginning inventory + net purchases – ending inventory = COGS. Remember BI + P – EI = COGS, and remember it’s just a simple formula, if you know 3 parts of the equation you can solve for the remaining variable. (2) Know how to determine COGS expense using cost flow assumptions (LIFO, FIFO, average cost, etc.)—simply apply a cost flow assumption to the EI balance to determine COGS. A COGS tool is available at download tools to help understand application of cost flow assumptions. (3) Know the JEs (purchasing and selling inventory) associated with a periodic versus perpetual inventory. Remember, the primary difference is timing of Inventory and COGS JEs: Perpetual, adjust inventory and COGS as purchases/sells occur; Periodic, these JEs made “one time” at end of accounting period. I know I said 3 inventory issues to focus on, but an accounting principles exam would not be complete without having to compute a few financial statement ratios, one of them dealing with COGS. In particular, the gross profit rate. Sales - COGS = Gross Profit (GP) and GP Rate = (GP/Sales). Other simple ratios may be expected such the inventory turn ratio (COGS/Average Inventory).
9. Study the textbook lingo/jargon. Exams will likely be peppered with an assortment of basic definition type questions dealing with concepts such as accounting assumptions and principles, accounting standards, and internal controls principles (Sarbanes–Oxley Act). Of course, focus on the chapters associated with accounting principles, part 1, and use flash cards or similar method to help remember definitions and key terminology.
10. Relax, knowing you are prepared! Remember; start preparing for the exam from day one, and practice, practice, practice…it’s true, accounting is best learned by doing!