In life, one needs to take responsibility for every action because there are rewards and consequences to every decision made.
To account is to give a detailed report of an event or experience. In financial terms, it is a record or statement of expenditures and receipts relating to a particular period or purpose. The rules and guidelines to follow when creating and reporting financial data are called “accounting principles”.
It is important to note that “Every transaction has a financial implication” and each decision made has an impact on the business.
In accounting, there are two parties involved in every transaction; the giver, and the receiver.
Generally accepted accounting principles include:
- Economic entity principle – states that a business is a separate entity from the owner and the financial activities of the business must be treated as such.
- Time period principle – states that accounts must be prepared at intervals and must be stated on the book of account as at when prepared e.g., quarterly, yearly etc
- Full disclosure principle – states that all information relative to the business that is important to the creditors and investors must be disclosed in the financial statements.
- Going concern principle – states that the business must carry on its operations
- Matching principle states that the business uses accrual basis of accounting that matches the business income to the business expenses within a given period.
The various types of accounting are:
- Financial Accounting
- Cost Accounting
- Management Accounting
- Tax Accounting
- Forensic Accounting
Major elements of accounts include:
- Assets – Any form of properties, tangible or intangible that could be converted to, or generate cash flow within a fiscal period (usually a year).
- Liabilities – could be described as financial obligations owed by the entity which will cause an outflow of cash from the firm or company.
- Owner’s Equity – are investments made by the owner or group of shareholders into the establishment and running of the financial activities of company.
- Revenue – This refers to income made from the core operations of a business.
- Expenses – are the costs incurred in running the business e.g., rent, salaries, utilities.
Financial accounting is based on the duality principle which states that each business transaction has a two-fold effect. Each transaction involves at least two accounts when recorded in the books. The book of the account that receives, the debit transaction, and the book of the giver, which is the credit transaction.
The different types of accounts include:
- Personal accounts are accounts that involve individuals, firms, companies, group of associations, etc.
- Real accounts are accounts that involve properties, assets, or possessions. They can be physical/tangible (equipment’s, land, machinery, cash, accounts receivables, investments) or non-physical/intangible (goodwill, trademarks, patents, copyright, treasury bills, intellectual properties, brand recognition, licensing, research & development) etc.
Books of accounts are records containing financial transactions of a business.
- Source documents are records that are generated on each business transaction. They are also referred to as supporting documents. Examples of source documents are invoices, receipt, cheques, credit note, debit note, bank statements, etc.
- Ledger is referred to as the final entry book. It shows the chronological arrangements of financial transactions, summarized journal entries of an account to get the reconciled balances. This book tracks your assets, liabilities, capital, revenue, and expenses.
- Journals is referred to as the original book of entry. It records the transaction of the business in the order of the date using the principle of debit and credit.
- Cash disbursement journal records and tracks the outflows of cash from the business
- Sales journal records sales on credit.
- Purchase journals records purchase on credit.