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).

Learn the basics of accounting, including the accounting equation, accounting principles, and accounting standards. Understand the rules and guidelines that govern financial reporting and prepare financial statements.