Accounting Basic

 

Accounting Basic

Accounting for the results of your business activities requires keeping your records organized and consistent. While businesses differ greatly, the basic accounting concepts critical to running any business remain the same.

Accounting, simply defined, is the method by which financial information is collected, processed, and summarized in financial statements and reports. An accounting system can be represented by the following graph, which is explained below.

1.    Each accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or bill of sale.

2.    A journal is a place to record the transactions of a business. Typical journals used to record chronological day-to-day transactions are a sales and cash receipts journal and a cash disbursement journal. A general journal is used to record special entries at the end of an accounting period.

3.    While a journal records transactions as they occur, a ledger groups transactions by type, based on the accounts they affect. The general ledger functions as a collection of all the balance sheet, income and expense accounts used to maintain the accounting records of a business. At the end of an accounting period, all journal entries are summarized and transferred to general ledger accounts. This procedure is called "publishing".

4.    A trial balance is prepared at the end of an accounting period by adding all the account balances in your general ledger. The sum of the debit balances must be equal to the sum of the credit balances. If the total debits are not equal to the total credits, you need to track the errors.

5.    Finally, the financial statements are prepared from the information in your trial balance.

Your accounting records are vitally important because the resulting financial statements and reports help you plan and make decisions. These statements and reports may be used by third parties, such as bankers, investors, or creditors, and are necessary to provide information to government agencies, such as the IRS.

Familiarize yourself with the basics of accounting

If you understand the definition and goals of an accounting system software, you are ready to learn the following accounting concepts and definitions.

·         Assets: Things of value held by your company. Assets are balance sheet accounts. Examples of assets are cash, accounts receivable, and furniture and fixtures.

·         Liabilities: what your business owes to creditors. Liabilities are balance sheet accounts. Some examples are accounts payable, payroll taxes payable, and loans payable.

·         Equity: The net worth of your company. Also called owner's equity or equity. The capital comes from the investment in the business by the owners, plus the accumulated net profits of the business that have not been paid to the owners. It essentially represents amounts owed to owners. Equity accounts are balance sheet accounts.

·         The Accounting Equation: Assets = Liabilities + Owner's Equity. The financial statement called the balance sheet is based on the "accounting equation". Note that assets are on the left side of the equation, and liabilities and stocks are on the right side of the equation. Similarly, some balance sheets are presented so that assets are on the left, liabilities, and stockholders' equity on the right.

·         Balance Sheet – Also called a statement of financial position, a balance sheet is a financial "snapshot" of your business as of a given date. It lists your assets, your liabilities, and the difference between the two, which is your equity or net worth. The balance sheet is a real life example of the accounting equation because it shows that assets = liabilities + owner's equity.

Considering a double-entry bookkeeping system

In double-entry bookkeeping, each transaction has two journal entries: a debit and a credit. Debits should always equal credits. Think of Newton's third law of motion: for every action (debit) there is an equal and opposite reaction (credit).

Because debits equal credits, double-entry bookkeeping avoids some common accounting errors. The errors that occur are easier to find. For this and many other reasons, double-entry accounting serves as the foundation of a true accounting system Philippines.

Every transaction in a double-entry bookkeeping system affects at least two accounts because at least one debit and one credit for each transaction. Typically, at least one of the accounts is a balance sheet account. Entries that are not made to a balance sheet account are made to an income or expense account. Income and expenses affect the net income of the business, which ultimately affects the owner's equity. Each transaction (journal entry) is a real-life example of the accounting equation (assets = liabilities + owner's equity).

Some simple accounting systems do not use the double entry system. You will have to choose between double-entry and single-entry bookkeeping. Due to the benefits described above, we recommend double-entry bookkeeping. Many computer accounting programs are based on a double-entry system, but are designed so that you enter each transaction once and the computer makes the corresponding second entry for you. The double entry portion continues "behind the scenes," so to speak.

You must also decide whether to use the cash or accrual method of accounting. We recommend the accumulation method because it provides a more accurate picture of your financial situation.

Double entry bookkeeping is the basis of all accounting. For every debit there is an equal and opposite credit.

Next to that, you have five forms of account:

·         Revenue (what you earn during a reported period)

·         Expense (what you use during a reported period)

·         Asset (you currently control it, it has future benefits)

·         Liability (you have a future obligation relating to a past activity)

·         Owner’s equity (the difference between assets and liabilities)

 

Accounts are maintained to know the financial position of an enterprise and interpreting the various accounting statements.

The three basic rules of accountancy are

(1) Debit the expense, Credit the income

(2) Debit what comes in, credit what goes out

(3) Debit the receiver and credit the giver.

Every transaction made in an enterprise have two effects.

Thus accountancy is double entry system.

There are two aspects of each transaction made, one is debit and another is credit. i.e. If it is a purchase of goods

(1) one aspect is goods come in business. So we have to debit goods account.

As according to principle debit what comes in. So Purchase account debit.

(2) second aspect is money spend for purchases. In this case money is given to the seller i.e from whom purchase is done. The money goes out. Credit what goes out.

Thus the entry in Journal is

Purchase Account Dr.

To Cash Account (Cr.)

Thus for each transaction there are two aspects.

Hope this may clear your Basic principle of Journal Entry.

Regarding double entry following site may make your double entry principle clear.