Accounting Basics

Accounting

Definition

• Accounting is the process of recording, classifying, reporting, and analyzing financial transactions and events of a business.

Branches of Accounting

• Financial Accounting: focuses on preparing financial statements for external users (investors, creditors)
• Managerial Accounting: focuses on providing financial information for internal decision-making
• Cost Accounting: focuses on calculating the cost of producing goods and services
• Tax Accounting: focuses on preparing tax returns and ensuring compliance with tax laws

Accounting Equation

• Assets = Liabilities + Equity
  • Assets: resources owned or controlled by the business
  • Liabilities: debts or obligations owed by the business
  • Equity: ownership interest in the business

Financial Statements

• Balance Sheet: snapshot of the business's financial position at a point in time
• Income Statement: summary of revenues and expenses over a period of time
• Cash Flow Statement: summary of inflows and outflows of cash over a period of time

Accounting Principles

• Accrual Accounting: revenues and expenses are recorded when earned or incurred, regardless of when cash is received or paid
• Matching Principle: expenses are matched with revenues in the same period
• Materiality: information is disclosed if its omission could influence investment decisions
• Consistency: accounting methods are consistent from period to period

Accounting Definition

• Accounting is the process of recording, classifying, reporting, and analyzing financial transactions and events of a business.

Branches of Accounting

• Financial Accounting focuses on preparing financial statements for external users such as investors and creditors.
• Managerial Accounting focuses on providing financial information for internal decision-making.
• Cost Accounting focuses on calculating the cost of producing goods and services.
• Tax Accounting focuses on preparing tax returns and ensuring compliance with tax laws.

Accounting Equation

• Assets = Liabilities + Equity
• Assets are resources owned or controlled by the business.
• Liabilities are debts or obligations owed by the business.
• Equity is the ownership interest in the business.

Financial Statements

• Balance Sheet provides a snapshot of the business's financial position at a point in time.
• Income Statement provides a summary of revenues and expenses over a period of time.
• Cash Flow Statement provides a summary of inflows and outflows of cash over a period of time.

Accounting Principles

• Accrual Accounting records revenues and expenses when earned or incurred, regardless of when cash is received or paid.
• Matching Principle matches expenses with revenues in the same period.
• Materiality principle states that information is disclosed if its omission could influence investment decisions.
• Consistency principle ensures that accounting methods are consistent from period to period.

Personal Finance

• Personal finance involves managing financial resources to achieve financial stability and security by making informed decisions about earning, saving, investing, and spending money to meet financial goals.

Key Concepts

• Budgeting: allocating income towards expenses, savings, and debt repayment through a plan.
• Saving: setting aside a portion of income for short-term or long-term goals.
• Investing: generating more money through vehicles like stocks, bonds, or real estate.
• Debt Management: strategies for paying off debts, such as credit cards, loans, or mortgages.

Financial Goals

Short-term Goals

• Creating an emergency fund with 3-6 months' living expenses.
• Paying off high-interest debt.
• Building a rainy day fund.

Long-term Goals

• Saving for retirement.
• Making major purchases (e.g., a house or car).
• Funding education or career development expenses.

Managing Debt

• Debt Snowball: paying off debts one by one, starting with the smallest balance.
• Debt Avalanche: paying off debts with the highest interest rates first.
• Consolidation: combining multiple debts into a single loan with a lower interest rate.

Investment Strategies

• Diversification: spreading investments across asset classes to minimize risk.
• Dollar-Cost Averaging: investing a fixed amount of money at regular intervals, regardless of market conditions.
• Long-term approach: focusing on long-term growth rather than short-term market fluctuations.