Introduction to Accounting Concepts

Introduction to Accounting

• Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions.
• It provides information about a business's financial performance and position.
• Key functions include identifying, measuring, recording, and communicating financial information.
• Information is used by management, investors, creditors, and other stakeholders.

Fundamental Accounting Concepts

• Double-entry bookkeeping: Each transaction affects at least two accounts, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.
• Accrual accounting: Revenue and expenses are recognized when earned or incurred, regardless of cash exchange. This differs from cash accounting.
• Matching principle: Expenses are matched with revenues in the period they are incurred, for accurate income statements.
• Consistency: Accounting methods are consistently applied across periods for comparison.
• Conservatism: When faced with two treatments, the one that less likely overstates assets or income is chosen.
• Materiality: Insignificant items are treated simply, avoiding unnecessary complexity.
• Going concern: Financial statements assume the business will operate for the foreseeable future.

Accounting Equation

• Assets = Liabilities + Equity
• Assets: Business resources (cash, accounts receivable, inventory).
• Liabilities: Business obligations to outsiders (accounts payable, loans).
• Equity: Residual interest in assets after liabilities (owner's capital).

Financial Statements

• Income Statement: Summarizes operations over a period, showing revenues, expenses, and net income/loss.
• Balance Sheet: Presents the financial position at a specific time, showing assets, liabilities, and equity.
• Statement of Cash Flows: Details cash sources and uses, categorized as operating, investing, and financing activities.
• Statement of Changes in Equity: Tracks changes in owner's equity over time, including retained earnings.

Key Accounting Principles

• Revenue recognition principle: Revenue is recognized when earned, not necessarily when cash is received.
• Expense recognition principle: Expenses are recognized in the same period as related revenue.
• Cost principle: Assets are initially recorded at historical cost.

Common Account Types

• Assets: Cash, Accounts Receivable, Inventory, Prepaid Expenses, Property, Plant, and Equipment (PP&E).
• Liabilities: Accounts Payable, Salaries Payable, Unearned Revenue, Notes Payable, Loans Payable.
• Equity: Common Stock, Retained Earnings, Dividends.

Accounting Methods

• Cash Basis Accounting: Income when cash is received, expenses when cash is paid.
• Accrual Basis Accounting: Income and expenses recognized when earned or incurred, not based on cash flow.

Accounting Standards and Regulations

• Generally Accepted Accounting Principles (GAAP): Rules for financial statement preparation in the US.
• International Financial Reporting Standards (IFRS): Globally used accounting standards.

Debits and Credits

• Debits and credits record transactions; increases in assets, expenses, and dividends are debited. Increases in liabilities, equity, and revenues are credited. Debits increase left-side accounts, credits increase right-side accounts.