Accounting is the language of business. It is the language every business executive should easily understand. Every other stakeholder in the business should understand accounting, not just business executives. All these people need to understand the current financial status of an organization and the events that cause the change in the status from some prior point in time. The purpose of an accounting system is to collect summarized and report information concerning the impact of various business events on an organization’s financial status and financial performance. The processes that lead to the financial statements can be visualized below.
Business transaction/ Event
Accounting transaction/ event
Financial balancing/ trial balance/ balance sheet
Some of the fundamental accounting customs include:
- The entity concept.
- The dual aspect concept.
- The money measurement concept.
- The cost concept
- The realization concept.
- The going concern concept
- The conservatism concept.
- The materiality concept, and
- The matching concept.
There are five major financial statements; namely:
- Income statement (Profit or loss accounts)
- Statement of CashFlow.
- Statement of Financial Position (Balance sheet).
- Statement of changes in equity.
- Notes to the financial statements.
Going to focus on the Statement of Financial Position (balance sheet) in this blog. The Balance Sheet measures the assets, liabilities, and owners’ equity of a business. In accounting, Assets must always be equal to liabilities plus equity. The formula for this is given thus
Assets = Liabilities + Owners Equity
This equality is known as the draught aspect concept of accounting. Basically, every accounting-related event that takes place in an organization can be analyzed in terms of its effect on this equation. At the end of the process, the two sides of the equation must remain equal. Their overall totals might change, however.
- Assets, otherwise known as resources. They refer to what a business owns or has claims to. Examples of assets include cash, accounts receivable, inventory, equipment, Etc. The assets of the company can further be divided into 2 categories, namely: Noncurrent assets or fixed assets, and Current assets.
If the intention is to consume it, use it up immediately, sell as it is or convert it to goods/ finished products, then it is called a current asset. Otherwise, it will be classified as a non-current asset or fixed asset. The keyword to look out for here is INTENTION.
2. Liabilities, otherwise known as debt. Dear presents obligations of the entity to outsiders. Some examples of liabilities include. Accounts payable. Loans payable. Interest payable. The liabilities of a company can further be divided into 2 categories, namely: Current liabilities or short-term liabilities, and Long-term liabilities or non-current liabilities.
3. Owners’ equity refers to what the business owes the owners. It represents the obligations of the entity to its owners. Owners’ equity can further be divided into: Share capital, and Reserves.
In our next blog session, we will have an in-depth analysis of the Statement of Financial Position, as well as other financial statements in accounting. Stay tuned.
To be continued…