Accounting is a business language that is used for declaring financial information to internal and external users of the business. Accounting is a process of identifying, measuring in terms of ‘money,’ recording, classifying, summarizing, transactions and events which have a financial character and interpreting these results.
Basic Concepts of Accounting:
You need to know about the basic concepts of accounting in order to properly set up your accounting system. Some basic concepts of accounting include:
- Debit and Credit: The general ledger contains both debit and credit accounting entries. The general ledger is comprised of all recorded financial transactions of the company. A debit in accounting is an entry that increases an asset account and decreases an expense account; a debit also decreases a liability account and an equity account. A credit does the exact opposite; it decreases an asset account and increases an income account. The total of all debits and credits is shown in the trial balance for each account.
- Assets and Liabilities: Assets and Liabilities play a vital role in accounting. The basic accounting equation (Assets = Liabilities + Equity) is the foundation for the entirety of the financial statements and is the basis for the double-entry form of accounting. In a corporation, capital represents Stockholders’ Equity.
Assets = Liabilities + Equity (Capital)
- Assets: Assets are items that are of ‘value’ to an organization. Assets are typically group in order of liquidity; which is the ease of conversion to cash and represents the livelihood of any organization. Cash is the most liquid of any asset.
- Liabilities: Liabilities are an obligation of the company; meaning money that the company owes to other parties. Liabilities include loans, accounts payable, deferred revenues and accrued expenses.
- Equity: Equity is the owner’s value in an asset, or particular group of assets. Typically it is the value of the assets contributed by these owners. Equity can also be referred to as Net Worth, Capital or Shareholders’/Stockholders’ Equity.
- Income Statement: The income statement is one of the three major financial statements. It represents the profit and loss of the company and reflects income and expenses of the company in a particular period of the year.
- Net Income: Net income is derived from the income statement. It reflects the overall profit and loss of the company or enterprise. It is calculated as an entity’s overall income minus total expenses; which can include items such as taxes, cost of goods sold, operating and non-operating expenses.
- Generally Accepted Accounting Principles (GAAP): GAAP is a set of rules and regulations set by the accounting policy boards that companies are required to use to prepare their financial statements. GAAP covers items from revenue recognition to balance sheet classification.
Beyond all this, if you want your business to operate successfully and be properly maintained in respect to all accounting records and/or financial analysis, you can consult with Evan Vitale, Certified Public Accountant.