Accounting Fundamentals

Accounting Equations

• The accounting equation is a fundamental concept in accounting that represents the relationship between a company's assets, liabilities, and equity.
• The accounting equation is: Assets = Liabilities + Equity
• This equation is also known as the "balance sheet equation" because it represents the balance sheet structure.
• The accounting equation is used to ensure that the financial statements are accurate and consistent.

Accounting Principles

• Accounting principles are the rules and guidelines that accountants follow when preparing financial statements.
• The main accounting principles are:
  • Accrual principle: revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid.
  • Matching principle: expenses are matched with the revenues they help to generate.
  • Materiality principle: information is disclosed if it could influence the decisions of stakeholders.
  • Consistency principle: accounting methods are consistent from one period to another.
  • Comparability principle: financial statements are presented in a way that allows comparability between companies.
  • Cost principle: assets and expenses are recorded at their actual cost.
  • Monetary unit principle: financial transactions are recorded in a common currency.
  • Going concern principle: financial statements are prepared assuming the company will continue to operate for the foreseeable future.

Accounting Standards

• Accounting standards are the rules and guidelines that govern financial reporting.
• The main accounting standards are:
  • International Financial Reporting Standards (IFRS): used in many countries around the world.
  • Generally Accepted Accounting Principles (GAAP): used in the United States.
  • International Accounting Standards (IAS): predecessor to IFRS.
• Accounting standards ensure that financial statements are presented in a consistent and transparent manner, allowing stakeholders to make informed decisions.
• Accounting standards cover topics such as:
  • Recognition and measurement of assets, liabilities, and equity.
  • Revenue recognition and expense classification.
  • Disclosure requirements for financial statements.
  • Accounting for specific industries or transactions (e.g. leases, income taxes).