Basic Accounting principles

The Business accounting class has been an interesting one, and I would like to share a few learnings that have been quite enlightening to me.

First is that, while as a project controls personnel, I would consider project resource as including personnel, funds, and equipment, in accounting resources are regarded as source of funds. In accounting, resources are also referred to as assets. Assets are derived from the sum of liability and owners’ equity. This equation is called a statement of financial position and it is popularly called a balance sheet. The balance sheet always references a period, which can be weekly monthly or yearly. The balance sheet therefore typically contains three main accounts; namely; the asset, liability and owners’ equity. The owners’ equity can then be split into two categories, namely the contributed capital and the earned capital. The sum of the contributed capital and earned capital is referred to as the statement of change in equity. It shows the movement of equity from beginning of the year till end year

Secondly is the concept of gearing ratio. This concept is quite new to me albeit quite enlightening. It is calculated by dividing the liability by the asset. The ratio is also referred to as financial leverage. A ratio higher than 50% means the Company is highly geared. In principle, the more liability a company has, the more geared it is.

A statement of profit or loss is the income statement, and it contains two major accounts namely, the revenue and expense account respectively. The profit or loss account also references a range of time called period. Profit or loss is the difference between revenue or sales (gross income) and expenses. When accomplishment is greater than effort, it results in a gain, while a lesser accomplishment than effort, results in a loss. A statement of cashflow on the other hand, though covers a period range as well, it records the cash inflow and cash outflow of an entity. For an entity to remain afloat, the inflow should be greater than the outflow. The amount remaining that is put back into the business after an entity has paid dividends to its shareholders is called retained earnings.

A third enlightening concept is the accruals and adjusting entries. Accruals is recognising revenues /expenses when earned not when cash is paid or received. Adjusting entries on the other hand, helps to know the true performance of an entity’s revenue and expenses. The entries can be deferrals or accruals. While deferrals can either be, prepaid expenses or unearned revenues, accruals are either accrued revenue or accrued expense.

Finally, a few accounting terminologies learnt that I consider are worth sharing are as below:

Cash to an individual is an investment, while to a company it is financing. In other words, while shareholders finance a business, individuals are said to invest in a business

Assets can also be tangible or intangible. Intangible assets are acquired to sell, use up, consume, convert to goods or service or cash. Intangible assets can also be cash by itself. These are also called current assets. Essentially, current assets bring benefits to the company such as directly generating income or enabling the generation of income. If intended use of asset at time of acquisition is none of the above listed, the asset can be referred to as Tangible also called Fixed assets.