Basic Concepts and Principles of Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to provide accurate and useful financial information for decision-making.
The main branches of accounting are financial accounting, managerial accounting, cost accounting, tax accounting, and auditing.
The accounting equation is Assets = Liabilities + Equity. It represents the relationship between a company's resources and the claims on those resources.
The fundamental accounting principles include the accrual principle, conservatism principle, consistency principle, cost principle, economic entity principle, full disclosure principle, going concern principle, matching principle, materiality principle, monetary unit principle, revenue recognition principle, and time period principle.
Double-entry accounting is a bookkeeping method where each transaction is recorded in at least two accounts, with debits equaling credits, to ensure the accounting equation stays balanced.
Bookkeeping involves recording financial transactions, while accounting includes bookkeeping plus summarizing, analyzing, and reporting financial data.
Debits and credits are accounting entries used to record transactions. 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.
The types of accounts in accounting are assets, liabilities, equity, revenues, and expenses.
The accrual basis of accounting records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.
The cash basis of accounting records revenues and expenses only when cash is received or paid.
The matching principle states that expenses should be recorded in the same period as the revenues they help to generate, ensuring accurate profit measurement.
The revenue recognition principle states that revenue should be recognized when it is earned and realizable, regardless of when cash is received.
The expense recognition principle, also known as the matching principle, states that expenses should be recognized in the same period as the revenues they help to generate.
The going concern assumption states that a business will continue to operate indefinitely, allowing the use of accounting methods that assume ongoing operation.
The economic entity assumption states that a business's financial activities are separate from the financial activities of its owners or other businesses.
The monetary unit assumption states that financial transactions should be recorded in a single currency, assuming that the currency remains stable over time.
The time period assumption states that financial reporting should be divided into specific time periods, such as months, quarters, or years, to provide timely information.
The cost principle states that assets should be recorded at their historical cost, which is the amount paid to acquire them, and not adjusted for changes in market value.
The full disclosure principle states that all information that could affect users' understanding of financial statements should be included in the financial reports.
The materiality principle states that financial statements should include all information that is material, meaning it could influence the decision-making of users.
The conservatism principle states that when choosing between two equally acceptable accounting methods, the one that is less likely to overstate assets and income should be chosen.
A general ledger is a comprehensive record of all financial transactions of a business, categorized by accounts, and used to prepare financial statements.
A trial balance is a statement that lists all the balances of a company's general ledger accounts at a specific point in time, used to verify that total debits equal total credits.
A trial balance is an internal report that lists all account balances to check the accuracy of the ledger, while a balance sheet is a financial statement that shows a company's financial position at a specific date.
A journal entry is a record of a financial transaction in the accounting journal, showing the accounts affected, amounts debited and credited, and a brief description of the transaction.
Adjusting entries are journal entries made at the end of an accounting period to update account balances before financial statements are prepared, ensuring accuracy according to the accrual basis of accounting.
Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts (revenues, expenses, and dividends) to permanent accounts (retained earnings), preparing the accounts for the next period.
A chart of accounts is a list of all the accounts used by a business in its general ledger, organized by categories such as assets, liabilities, equity, revenues, and expenses.
A subsidiary ledger is a detailed ledger that contains the individual transactions for a specific account, such as accounts receivable or accounts payable, which are summarized in a controlling account in the general ledger.
A controlling account is a general ledger account that summarizes the total balances of a group of related subsidiary ledger accounts, such as accounts receivable or accounts payable.
The accounting cycle is the series of steps followed in the accounting process, from recording transactions to preparing financial statements and closing the books for a period.
A fiscal year is a 12-month period used by a business for financial reporting and budgeting, which may or may not coincide with the calendar year.
A fiscal year is a 12-month period chosen by a business for financial reporting, while a calendar year runs from January 1 to December 31.
A financial statement is a formal record of a company's financial activities and position, including the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
The main components of financial statements are the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
A balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a specific point in time, providing a snapshot of its financial position.
An income statement is a financial statement that shows a company's revenues, expenses, and profits or losses over a specific period, providing information about its financial performance.
A statement of cash flows is a financial statement that shows the inflows and outflows of cash during a specific period, categorized into operating, investing, and financing activities.
A statement of changes in equity is a financial statement that shows the changes in a company's equity during a specific period, including profits, losses, dividends, and other equity transactions.
A balance sheet shows a company's financial position at a specific point in time, while an income statement shows a company's financial performance over a specific period.
A statement of retained earnings is a financial statement that shows the changes in retained earnings during a specific period, including net income and dividends paid.
A statement of comprehensive income is a financial statement that shows all changes in equity during a specific period, including net income and other comprehensive income items such as unrealized gains and losses.
The purpose of financial statements is to provide useful financial information to stakeholders, such as investors, creditors, and management, to aid in decision-making and assessing a company's financial health and performance.
Notes to financial statements are additional disclosures that provide detailed information about the financial statements, including accounting policies, explanations of specific items, and other relevant information.
Assets are resources owned by a company, liabilities are obligations owed to others, and equity represents the owner's residual interest in the company's assets after deducting liabilities.
Current assets are assets that are expected to be converted to cash or used up within one year or one operating cycle, whichever is longer, such as cash, accounts receivable, and inventory.
Non-current assets are long-term assets that are expected to be used for more than one year, such as property, plant, and equipment, intangible assets, and long-term investments.
Current liabilities are obligations that are expected to be settled within one year or one operating cycle, whichever is longer, such as accounts payable, short-term debt, and accrued expenses.
Non-current liabilities are long-term obligations that are not expected to be settled within one year, such as long-term debt, deferred tax liabilities, and pension obligations.
Owner's equity, also known as shareholders' equity or stockholders' equity, represents the owner's residual interest in the company's assets after deducting liabilities. It includes common stock, retained earnings, and additional paid-in capital.
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