Accounting Fundamentals

Accounting Definition

• Accounting is the process of recording, classifying, and reporting financial transactions and events of a business or organization.
• It provides stakeholders with financial information to make informed decisions.

Accounting Branches

• Financial Accounting: focuses on preparing financial statements for external stakeholders (e.g., investors, creditors).
• Managerial Accounting: focuses on providing financial information to internal stakeholders (e.g., management) for decision-making.

Accounting Principles

• Accounting Entity: separates business transactions from personal transactions.
• Going Concern: assumes the business will continue to operate for the foreseeable future.
• Monetary Unit: records transactions in a common currency.
• Historical Cost: records transactions at their original cost.
• Matching Principle: matches expenses with revenues in the same period.
• Materiality: only reports material transactions that affect financial decisions.
• Consistency: applies accounting methods consistently across periods.
• Comparability: allows for comparison between companies.

Financial Statements

• Balance Sheet: presents the company's financial position at a specific point in time.
• Income Statement: presents the company's revenues and expenses over a specific period.
• Cash Flow Statement: presents the company's inflows and outflows of cash over a specific period.

Accounting Cycle

1. Identify and Record Transactions: journals and ledgers are used to record transactions.
2. Classify and Post Transactions: transactions are classified and posted to the ledger.
3. Prepare Trial Balance: a list of all general ledger accounts and their balances.
4. Prepare Financial Statements: financial statements are prepared from the trial balance.
5. Close Accounts: temporary accounts are closed to prepare for the next accounting period.

Accounting Ratios

• Liquidity Ratios: measure a company's ability to pay short-term debts (e.g., Current Ratio).
• Profitability Ratios: measure a company's ability to generate earnings (e.g., Gross Margin Ratio).
• Efficiency Ratios: measure a company's ability to use its assets efficiently (e.g., Asset Turnover Ratio).
• Solvency Ratios: measure a company's ability to pay long-term debts (e.g., Debt-to-Equity Ratio).

Accounting Definition

• Accounting is the process of recording, classifying, and reporting financial transactions and events of a business or organization.
• It provides stakeholders with financial information to make informed decisions.

Accounting Branches

• Financial Accounting focuses on preparing financial statements for external stakeholders (e.g., investors, creditors).
• Managerial Accounting focuses on providing financial information to internal stakeholders (e.g., management) for decision-making.

Accounting Principles

• Accounting Entity separates business transactions from personal transactions.
• Going Concern assumes the business will continue to operate for the foreseeable future.
• Monetary Unit records transactions in a common currency.
• Historical Cost records transactions at their original cost.
• Matching Principle matches expenses with revenues in the same period.
• Materiality only reports material transactions that affect financial decisions.
• Consistency applies accounting methods consistently across periods.
• Comparability allows for comparison between companies.

Financial Statements

• Balance Sheet presents the company's financial position at a specific point in time.
• Income Statement presents the company's revenues and expenses over a specific period.
• Cash Flow Statement presents the company's inflows and outflows of cash over a specific period.

Accounting Cycle

• Identify and Record Transactions use journals and ledgers to record transactions.
• Classify and Post Transactions classify transactions and post to the ledger.
• Prepare Trial Balance create a list of all general ledger accounts and their balances.
• Prepare Financial Statements prepare financial statements from the trial balance.
• Close Accounts close temporary accounts to prepare for the next accounting period.

Accounting Ratios

• Liquidity Ratios measure a company's ability to pay short-term debts (e.g., Current Ratio).
• Profitability Ratios measure a company's ability to generate earnings (e.g., Gross Margin Ratio).
• Efficiency Ratios measure a company's ability to use its assets efficiently (e.g., Asset Turnover Ratio).
• Solvency Ratios measure a company's ability to pay long-term debts (e.g., Debt-to-Equity Ratio).

Learn about the basics of accounting, its definition, and its branches, including financial and managerial accounting.