Accounting 101
đź’ˇ Accounting is the language of business. It's a system for recording, summarizing, and communicating financial information about a company or organization.
The fundamental equation in accounting is: Assets = Liabilities + Owners' Equity
- Assets are the things a company owns that have value, like cash, inventory, equipment, and buildings.
- Liabilities are the debts or obligations a company owes, such as loans, accounts payable, and wages owed.
- Owners' Equity represents the owners' investment and retained earnings in the company.
Transactions are events that change a company's financial position and must be recorded in the accounting system. The accounting cycle starts with analyzing and journalizing transactions as debits and credits in a general journal.
Debits increase asset or expense accounts and decrease liability, equity or revenue accounts.Credits increase liability, equity or revenue accounts and decrease asset or expense accounts.After journalizing, transactions are posted to the general ledger accounts.
At the end of an accounting period, accounts are totaled and adjusted to ensure accurate reporting. Financial statements like the income statement, balance sheet, and cash flow statement are then prepared from the adjusted accounts.
- The income statement shows a company's revenues and expenses over a period of time.
- The balance sheet is a snapshot of a company's assets, liabilities and equity at a specific point in time.
- The trial balance is a report run for an accounting period, listing the ending balance in each account.
- The cash flow statement shows the inflows and outflows of cash from operating, investing and financing activities.
Generally Accepted Accounting Principles (GAAP) are the standards and rules that govern accounting practices.
Key accounting principles include the cost principle, revenue recognition, matching, and conservatism.
Accounting provides critical financial data for internal decision-making and external reporting to stakeholders.
From recording transactions to preparing statements, accounting is the systematic process of measuring and communicating a company's financial performance and position.
Accounting will allow you to understand your company’s finances, make business decisions and present information to other readers of financial information, including external readers (e.g., bankers, investors, buyers) and internal users (e.g., valuation specialists, managers).
