Accounting Basics Overview

Account Overview

• An account is a record of financial transactions related to a specific entity (person, business, or organization).
• Accounts track money entering and leaving the entity.
• This record-keeping monitors assets, liabilities, and equity.
• Accounts are fundamental for financial reporting and analysis, showing financial health and performance.
• Accurate record-keeping is essential in accounting and finance.

Types of Accounts

• Asset Accounts: Represent owned economic resources.

  • Examples: cash, accounts receivable, inventory, property, plant, and equipment.
  • Increased by debits, decreased by credits.

• Liability Accounts: Represent obligations to others.

  • Examples: accounts payable, salaries payable, loans payable.
  • Increased by credits, decreased by debits.

• Equity Accounts: Represent owner's stake in the entity.

  • Examples: common stock, retained earnings.
  • Increased by credits, decreased by debits.

• Revenue Accounts: Record resource inflow from primary activities.

  • Examples: sales revenue, service revenue, interest revenue.
  • Increased by credits, decreased by debits.

• Expense Accounts: Record resource outflow in generating revenue.

  • Examples: cost of goods sold, salaries expense, rent expense, utilities expense.
  • Increased by debits, decreased by credits.

Account Structures

• Accounts are organized in a general ledger summarizing all accounts in a business.
• Each account has a unique number for easy identification and tracking.
• This structure allows categorization and sorting of financial transactions.

Account Relationships

• Accounts are connected by the fundamental accounting equation (Assets = Liabilities + Equity).
• This ensures accounting records balance.
• Any transaction impacting the equation must maintain this balance.

Account Usage

• Accounts are used for financial reporting, including:
  • Preparing financial statements.
  • Analyzing business performance.
  • Making investment and financing decisions.
  • Meeting regulatory reporting requirements.

Important Considerations

• Accurate financial statements rely on proper account record-keeping and maintenance.
• Timely and accurate account updates are essential.
• Implementing internal controls prevents fraud and errors.
• Regular reconciliation ensures reliable and accurate financial data. Errors lead to misstatements impacting business performance assessment.