Accounting Concepts, Principles and Basic Terms


Accounting Concepts, Principles and Basic Terms

Based on Joe’s business plan, Marilyn sees that there will likely be thousands of transactions each year. She states that accounting software will allow for the electronic recording, storing, and retrieval of those many transactions. Accounting software will permit Joe to generate the financial statements and other reports that he will need for running his business. Financial accounting (or financial accountancy) is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business.[1] This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

As these items are sold to customers, the inventory account will lower. Sir can you please explain us what is the difference between “statement” , balance “sheet” and “account”. in cash basis accounting income are recorded when it is actually received and expenditure are recorded when it is actually paid.

They arise from present obligations of a particular entity to transfer assets or provide services to other entities in future as a result of past transaction or events. For example, Kartik took loan from the Bank. This loan is basically a liability which Kartik needs to pay in future.

IFRS are issued by the International Accounting Standards Board (IASB).[2] With IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organizations. At some point you would like your assets to be converted into cash (e.g. your customers pay their bills) or you will have to pay your suppliers.

Accountants take bookkeepers’ transactions, classify and summarize the financial information, and then prepare and analyze financial reports. Accountants also develop and Balancing off Accounts manage financial systems and help plan the firm’s financial strategy. A journal entry is a summary of a transaction. The journal entry consists of debits and credits.

14. Journal entries

Hope you are learning basic accounting and you are pretty clean with the Income Statement. Let us now move forward to the Balance Sheet. For a business like above, there will be thousands and thousands of transactions each year. It will be difficult for Kartik to put all these transactions together in a structured format.

basic accounting

The Balance Sheet is one of the two most common financial statements produced by accountants. This section pertains to potentially confusing terms that relate to the balance sheet.

Your accounts payable balances are considered liabilities because that’s what you currently owe your vendors. Loans are also considered a liability. Likewise, if you’re making a credit entry, you will have to make a corresponding debit entry. This ensures that your accounts remain in balance. While sole proprietors and freelancers may not need to employ double-entry accounting, small and growing businesses will be better served by doing so.

With thousands of such transactions in a given year, Joe is smart to start using accounting software right from the beginning. Accounting software will generate sales invoices and accounting entries simultaneously, prepare statements for customers with no additional work, write checks, automatically update accounting records, etc.

  • If someone else owns it, it belongs in the liabilities section.
  • The trial balance, which is usually prepared using the double-entry accounting system, forms the basis for preparing the financial statements.
  • There will be a decrease when the corporation has a net loss.
  • The second important part is the Retained Earnings.
  • The results of all financial transactions that occur during an accounting period are summarized into the balance sheet, income statement, and cash flow statement.
  • Generally Accepted Accounting Principles, or GAAP, are a set of guidelines and rules that govern how businesses handle their accounting.

A company will usually issue financial statements on a quarterly basis. The main components of the financial statements are the income statement, balance sheet, cash flow statement and the notes to the financial statements. The income statement shows the revenues and expenses the company experienced for the period.

These are the rules that all accountants abide by when performing the act of accounting. These general rules were established so that it is easier to compare ‘apples to apples’ when looking at a business’s financial reports. Cost of Goods Sold are the expenses that directly relate to the creation of a product or service.

Cash Flow

For internal accounts, this could be monthly or quarterly. For external accounts, the accounting period is usually 12 months. The balance sheet is made up of three main categories—assets, liabilities, and equity—and relies on the accounting equation, which says that assets must equal liabilities plus equity. Unlike the income statement, which measures performance over time, the balance sheet simply shows the current state of the business at a single moment in time.

Equity represents your current financial interest in your business and is derived by subtracting your total liabilities total from your total assets. If you have employees or you sell products, you should be using the accrual accounting method. This method records all revenue/income and expenses as they occur, not when your customer pays or you write a check for a bill. After setting up your chart of accounts, you will need to decide what type of accounting method you will use.

It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions.

basic accounting

I designed this basic accounting course to give you an understanding of the basic accounting principles, transactions, and operations. Each section has many examples of real business transactions and even sample ledgers and financial statements to help you understand the concepts. This means that all the assets owned by a company have been financed from loans from creditors and from equity from investors. “Assets” here stands for cash, account receivables, inventory, etc., that a company possesses. These entries show that your cash (a balance sheet account) has increased by $1,500, and your accounts receivable have decreased by $1,500.

Using generally accepted accounting principles, accountants record and report financial data in similar ways for all firms. They report their findings in financial statements that summarize a company’s business transactions over a specified time period. As mentioned earlier, the three major financial statements are the balance sheet, income statement, and statement of cash flows.

The preparation of the financial statements is the seventh step in the 9-step accounting cycle. However, we decided to present this first before getting into the whole process for you to have a picture of what we are trying to produce in an accounting system. This chapter provides a fresh look into accounting.

basic accounting