Accounting is the practice of logging, classifying, and compiling financial transactions to produce data that aids in company decision-making. Understanding and applying the foundational ideas and rules of accounting are necessary for recording and analyzing financial data in basic accounting.
The following are some fundamental accounting key words and concepts:
- Assets are resources that belong to a company, have a monetary value, and are anticipated to produce future financial gains. Examples are Cash, receivables, lands, equipment, machineries, properties, etc.
- Liabilities: Liabilities are debts that a company owes to third parties and which are anticipated to be repaid in the future. Examples are Accounts payable, loans payable, and notes payable
- Equity: The remaining stake in a company’s assets after liabilities are subtracted. It represents the owners’ financial commitment to the company. Retained earnings and owner’s equity make up additional categories of equity.
- Revenue: The inflow of financial resources as a result of the sale of goods or services is known as revenue.
- Expenses: Expenses are amounts of financial resources made in order to produce income. Salary, rent, utility costs, and depreciation are some examples.
- Chart of accounts and journal entries: Businesses utilize a system of accounts, which consists of an account sheet and journals, to keep track of financial transactions. A business’s accounts are listed in the chart of accounts, while specific sorts of activities, such as sales, purchases, and cash receipts, are recorded in journals.
To ensure that the accounting equation (Assets = Liabilities + Equity) is constantly in balance, double-entry accounting requires that every transaction be recorded in two accounts with equal debits and credits.
The process of documenting, compiling, and disclosing a business entity’s financial transactions in line with generally accepted accounting standards is known as corporate financial accounting (GAAP). It entails preparing financial statements that fairly represent the company’s financial situation, operating results, and cash flows.
The main products of financial accounting are financial statements. The balance sheet, income statement, and cash flow statement are the three main financial statements.
- A balance sheet is a statement that shows the financial standing of a company at a specific point in time. It reveals the assets, liabilities, and equity of the business.
- Income statement: The performance of a company’s finances over time is shown in this statement. It details the business’s earnings, costs, and net income.
- Statement of cash flow: The cash inflows and outflows during a specified time period are shown in the cash flow statement. It provides information about the business’s funding, investment, and operational activities.
Under accrual accounting, regardless of when cash is collected or paid, revenue and costs are recorded as soon as they are earned or incurred.
Depreciation is the distribution of a long-term asset’s cost over the course of its useful life. It is a non-cash charge that lowers the asset’s balance sheet book value.
Financial ratios are computations that are used to assess the health and performance of a company’s finances. The debt-to-equity ratio, current ratio, and return on equity (ROE) are a few examples of financial ratios.