Accounting Basics K-12

Study Notes

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.

Description

This quiz covers fundamental concepts of accounting, including definitions and types of accounts. You will learn about assets, liabilities, equity, and revenue, along with examples for each type. Perfect for students seeking to understand financial transactions in a business context.