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- Why is Accounting Important?
- Accounting Concepts, Principles and Basic Terms
- All About Accounting: Basics Tutorial
The worldview of accounting and accountants may certainly involve some unhelpful characters poring over formidable figures stacked up in indecipherable columns.
Accounting is important for small business owners as it helps the owners, managers, investors and other stakeholders in the business evaluate the financial performance of the business. Accounting provides vital information regarding cost and earnings, profit and loss, liabilities and assets for decision making, planning and controlling processes within a business. The main objective of accounting is to record financial transactions in the books of accounts to identify, measure and communicate economic information. Moreover, tax reporting agencies require you to keep books at a minimum level that tracks income and expenditure.
Why is Accounting Important?
Accounting is one of those concepts and fields that can easily throw you off, especially when it comes to all that terminology used. You can grasp these and many other basic accounting principles with ease. This tutorial is tailored to provide you with all you need to know about accounting. General Ledger and the Chart of Accounts are central to accounting and understanding what it is and how it works is very crucial to proper accounting.
For example, you record all property under assets; salaries under expenses, and sales under income. Entries in the chart of accounts are then summarized into a financial report that can be validated by a document called a trial balance. It is possible to organize and create an accounting system based on the above five primary Accounts. However, to make the accounting process more organized and easier to locate specific transactions, it is advisable to create various smaller Accounts under each major entry.
Assets refer to things the company or business owns and that have commercial value. Liabilities are debts the business owes. Income section can have accounts listing revenues from sales, interest, and other monies that come into the business. Expenses include money spent in the course of business transactions. Accounts could include labor, advertising costs, salaries, and other bills. An understanding of the accounting process largely relies on these two terms: Debits and Credits. Although the terminology can be a little confusing, mastering their application in accounting is essential in double-entry accounting.
For example, assume your business secures a bank loan thus increasing the bank balances. That makes the transaction a debit entry because it increases cash at the bank, but because the loan increases liabilities, it is also recorded on the credit side.
If you withdraw the cash to pay for equipment then the bank account decreases credit while cash on hand increases debit.
Debit and Credit entries are at the center of the double-entry accounting concept. What this means is that every transaction has to balance i. Every record as a debit or credit in the general ledger is an entry. You must post or record the entries correctly on either side of the ledger. Failing to post any entry affects transaction records, which in effect will result in errors.
Note that every transaction has to be of equal value and appear as debit and credit. Record the transactions in a double-entry system to reflect on both bank account and income account balances.
You will then need to match the transaction by recording it on the credit side in the income account still under Assets. That will increase the income account balance. Apply the above rules for debit or credit entries to any transaction and ensure they balance out. Each entry has a date, the account names to be debited and credited and the amount s involved.
To make the recording more organized, indent the account name of the entry to be recorded to the credit side. In other cases, however, accountants find it necessary to post correcting entries that do not directly come from the source journals. An entry in a general journal would be something like miscellaneous expenses. Financial statements refer to the various reports and documents accountants generate from the information recorded in the general ledger.
Of financial statements in accounting, the balance sheet and the income statement are the most common. The report is prepared at a given period and uses information sourced from three Accounts in the ledger: Assets, Liabilities, and Equity. Take total assets and subtract total amounts in liabilities.
To calculate net profit or net loss, take total income, and subtract total expenses incurred over the period in question. One principle you need to understand is the fact that there is a direct link between the balance sheet and then the income statement. Grasping how these two documents work is a big step towards understanding accounting.
The above scenario appears because the bill amount is an entry under Expenses which is used in the Income Statement. When profit decreases it affects the Balance Sheet. In this example, we show you how to make specific debit and credit entries and use that to generate a Balance Sheet and Income Statement. The money is in your bank account- debit that as an Asset. The same amount is your net worth so that goes to Equity and is recorded on the credit side.
Remember debits increase Assets while credits increase Equity. At this point, you have no liabilities. In short;. If you have another financial transaction, say a mortgage payment and a monthly salary, make the entries on the appropriate sides of the accounting model. Record the deposit under Assets bank account — credit side. It means your books are still balanced. Try to balance the accounts.
Note that you recorded salary under Income and the bill under Expenses. These two accounts are not used when generating a Balance Sheet. In most cases, we record mortgage payments in two parts: interest and capital. Your entries for the above transaction will, therefore, be something like this:. As you can see, the transaction balances. For a long list of journal and ledger entries, use the figures to formulate a trial balance to ascertain there are no entry errors.
Record the entries in the appropriate account as either debit or credit. However, when payment is made, move the record to the bank account values will increase or decrease as per the type of transaction.
The accounting method you choose will depend on how you handle sales and purchases concerning tax reporting. Choosing either method depends on the size of the company or if the wish is to optimize cash-flow. It is possible to use both methods, with reports on cash position complementing the need to report on tax correctly.
Some jurisdictions demand that businesses collect sales tax and remit the same to tax authorities. What business pays as sales tax reduces in tandem with what the business pays to suppliers as sales tax. Businesses can also benefit from cash refunds from the government in case the company has more purchases than sales within a certain period.
As noted above, reporting on sales tax will be timed depending on what method of accounting method chosen cash vs. Record the sale under income, while the tax part under liability accounts.
When dealing with these entries, the amounts involved will be the same within the Asset Accounts. That, however, works if the assets have tangible value and command a re-sale value. For current assets that are likely to lose value over a short period, it is better to record them under Expenses. Decide whether the items you buy qualify as long-term or fixed assets Capital Expense or short term and thus Revenue Expense.
Check with your local tax authorities on this to properly code entries on your Balance Sheet and Income Statement. Solutions for FinTech. All About Accounting: Basics Tutorial. The Chart of Accounts generally has 5 main sections: Assets Liabilities Equity Income Expenses It is possible to organize and create an accounting system based on the above five primary Accounts.
Debits and Credits An understanding of the accounting process largely relies on these two terms: Debits and Credits. Differentiating transactions from entries Every record as a debit or credit in the general ledger is an entry.
Here is how debit and credit entries impact the Accounts in General Ledger. A DEBIT entry in any of the five primary Accounts will have these effects on account balances: Assets balances will increase liabilities balances decrease equity balances decrease income balances decrease expenses balances increase Any CREDIT entry made to any of the primary Accounts will change balances as follows: Assets balance value decreases Liabilities entry increases balances Equity triggers an increase in the balances Income account balances increase Expenses credit entries decrease expense account balances Look at this example that illustrates the above scenarios.
Financial Statements Financial statements refer to the various reports and documents accountants generate from the information recorded in the general ledger.
Understanding the relationship between the Balance Sheet and the Income Statement One principle you need to understand is the fact that there is a direct link between the balance sheet and then the income statement. Example In this example, we show you how to make specific debit and credit entries and use that to generate a Balance Sheet and Income Statement.
The records, therefore, are balanced. Add another transaction If you have another financial transaction, say a mortgage payment and a monthly salary, make the entries on the appropriate sides of the accounting model.
These new entries decrease the balances in both the bank account and on the mortgage. Account Receivables and Payables These are special accounts put in place to record invoice amounts related to a sale or purchase. Accounting Methods: Cash or Accrual? The cash method is when tax assessment only occurs on payment and not the date of the invoice.
Accounting Concepts, Principles and Basic Terms
Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. Featured Online Programs Find a program that meets your affordability, flexibility, and education needs through an accredited, online school. GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons. Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions.
All About Accounting: Basics Tutorial
Debits and Credits
Updated on Jan 05, - PM. Financial accounting refers to collecting, summarizing and presentation of the financial information resulting from business transactions. It reports the operating profit and the value of the business to the stakeholders. In other words, financial accounting is used for reporting financial transactions to the stakeholders in a format that is acceptable and adaptable by all businesses. Accounting Concepts that form the basis of financial accounting are:.
The textbook provides a thorough overview of the accounting system. It delves quite a bit into the "why" of accounting which is sometimes glossed over in favor of mechanics in other texts. Comprehensiveness rating: 5 see less. The life examples are drawn from companies which are relevant and understandable to students today. Looking at this from the context of a non-native English speaker, some of the language or vocabulary would be difficult to comprehend. Words such as ancillary even though explained later, might turn off a reader who already struggles with the language.
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