Accounting Basics K-12

Account Definition

• An account is a record of financial transactions.
• It tracks the inflows and outflows of money, assets, or liabilities.
• Accounts are used to track the balances of specific items, like cash, inventory, or accounts payable.
• Different types of accounts are used for different purposes, such as tracking income, expenses, assets, and liabilities.

Account Types

• Assets: Represent resources owned by the entity, with future economic benefits.
  • Examples: Cash, accounts receivable, inventory, property, plant, and equipment (PP&E).
• Liabilities: Represent obligations owed by the entity.
  • Examples: Accounts payable, salaries payable, loans payable.
• Equity: Represents the ownership interest in the entity.
  • Examples: Common stock, retained earnings.
• Revenue: Represents the increase in assets or decrease in liabilities from delivering goods or services to customers.
  • Examples: Sales revenue, service revenue.
• Expense: Represents the decrease in assets or increase in liabilities from operating the business.
  • Examples: Salaries expense, rent expense, utilities expense.

Double-Entry Bookkeeping

• The fundamental principle behind most accounting systems.
• Every transaction affects at least two accounts.
• Increases in assets, revenues, and equity are recorded as debits.
• Increases in liabilities, expenses, and dividends are recorded as credits.
• Debits and credits must always be equal.

Account Balancing

• The process of ensuring that the debits and credits in an account are equal.
• This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
• For example if an expense is recorded as a debit, an expense account and a corresponding balance to a liability or equity account (such as cash) must be credited matching the debit.
• Any imbalance indicates an error that must be corrected before proceeding to further financial processes.

Account Analysis

• Examining account balances to understand the financial health and performance of an entity.
• Analyze trends in account balances over time to evaluate changes in profitability or efficiency
• Identify anomalies or outliers that might indicate potential issues.

Account Usage

• Financial reporting (e.g., balance sheets, income statements).
• Budgeting and forecasting.
• Decision-making.

Account Maintenance

• Proper record-keeping
• Accurate recording of transactions
• Regular balancing of accounts
• Reconciling accounts with external sources, such as bank statements.