Fundamentals of Accounting Principles

Accounting Principles

• Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information.
• It helps in decision-making for various stakeholders like investors, creditors, management, and government.
• Fundamental accounting principles ensure objectivity, consistency, and comparability of financial statements.

Accounting Equation

• The accounting equation is the bedrock of accounting. It states that Assets = Liabilities + Equity.
• This equation must always balance. Any transaction will affect at least two accounts.
• Assets are resources owned by the business.
• Liabilities are obligations of the business to others.
• Equity represents the owners' stake in the business.

Types of Accounts

• Accounts are used to record and categorize transactions.
• They are classified as:
  • Real Accounts: These accounts represent the permanent nature of the business, such as assets, liabilities, and capital.
  • Nominal Accounts: These accounts are temporary and reflect the business performance over a specific period, like revenue and expenses.
• Accounts have debit and credit sides.

Double-Entry Bookkeeping

• All business transactions are recorded using double-entry bookkeeping.
• Every debit must have a corresponding credit of equal amount.
• This ensures that the accounting equation remains in balance.

Journal Entries

• Journal entries record transactions chronologically.
• They are the first step in the accounting cycle.
• Debit and credit entries are used to reflect the impact on different accounts.
• A journal entry includes date, account titles, and debit and credit amounts.
• Sample format: Accounts receivable Dr. & Sales Cr.

Ledger

• A ledger is a book of accounts where all transactions are recorded in chronological order.
• It shows the debit and credit balances of each account.
• Ledgers maintain a detailed record of business transactions.

Trial Balance

• A trial balance is a statement that lists all the accounts and their balances from the ledger.
• It is prepared to check the arithmetic accuracy of the ledger.
• It's a way to see if debits equal credits.

Financial Statements

• Financial statements provide a summary of the financial performance and position of a business.
• These statements are:
  • Balance Sheet: Shows a snapshot of the financial position on a specific date.
  • Income Statement: Summarizes the financial performance over a period of time.
  • Cash Flow Statement: Shows the movement of cash during a period.

Basic Accounting Concepts

• Going Concern: Assumes the business will continue its operations in the foreseeable future.
• Accrual Basis: Records revenues when earned and expenses when incurred, regardless of when cash is received or paid.
• Matching Principle: Matches revenues with expenses incurred to determine profit or loss for a specific period.
• Consistency: Applying accounting methods consistently from one period to the next.
• Materiality: Only significant items are recorded in detail. Minor amounts are aggregated.
• Objectivity: Financial information is based on verifiable evidence.
• Conservatism: When there are two options, the option that is least likely to overstate assets or income is chosen.

Basic Accounting Transactions

• Purchase of goods on credit: Accounts for buying supplies on credit.
• Purchase of goods for cash: Accounts for buying supplies for cash.
• Sales on credit: Accounts for sales made on credit.
• Sales for cash: Accounts for sales made for cash.
• Payment of expenses: Accounts for paying various business expenses.

Further Considerations

• Understanding different costing methods (FIFO, LIFO, Weighted Average) is essential in inventory accounting.
• Depreciation of assets is a crucial part of accounting.
• Various accounting standards and regulations (e.g., GAAP) are in play and must be followed in business.
• Software and technology play increasingly important roles in accounting processes.