Introduction to Accounting Principles

Introduction to Accounting

• Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions to provide information useful for decision-making.
• It's a fundamental part of business operations, enabling informed choices about investments, operations, and financing.
• Key users of accounting information include investors, creditors, managers, and government agencies.

Basic Accounting Concepts

• Double-entry bookkeeping: Every transaction affects at least two accounts, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.
• Accrual basis accounting: Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands. This contrasts with cash basis accounting, which recognizes transactions when cash is received or paid.
• Going concern assumption: Financial statements are prepared on the assumption that the business will continue its operations into the foreseeable future.
• Matching principle: Expenses are matched with the revenues they generate during a period. This helps to accurately reflect profitability.
• Time period assumption: Financial statements are prepared for specific time periods (e.g., monthly, quarterly, annually), allowing for consistent comparison over time.
• Objectivity principle: Financial information should be based on verifiable evidence rather than opinions or estimates.

Fundamental Accounting Equation

• Assets = Liabilities + Equity
• Assets: Resources owned or controlled by a company that are expected to provide future economic benefits. Examples include cash, accounts receivable, equipment, and buildings.
• Liabilities: Obligations of a company to others (e.g., creditors and employees) that are expected to result in future outflows of resources. Examples include accounts payable, salaries payable, and loans payable.
• Equity: Represents the owners' stake in the company. This is the residual interest in the assets after deducting liabilities.

Basic Financial Statements

• Income Statement: Reports a company's financial performance over a period of time, showing revenues and expenses. The result is net income or net loss.
• Balance Sheet: Presents a snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity.
• Statement of Cash Flows: Summarizes cash inflows and outflows during a period, categorized into operating, investing, and financing activities.

Key Accounting Principles

• Cost principle: Assets are recorded at their original cost.
• Full disclosure principle: All relevant financial information must be disclosed to users of financial statements.
• Conservatism principle: When in doubt, choose the approach that results in less optimistic financial reporting.

Types of Accounts

• Assets: Increased by debits, decreased by credits
• Liabilities: Increased by credits, decreased by debits
• Equity: Increased by credits, decreased by debits
• Revenue: Increased by credits, decreased by debits
• Expenses: Increased by debits, decreased by credits

Deferrals and Accruals

• Deferrals: Cash received or paid in one period but recognized in a future period (e.g., prepaid expenses, unearned revenue).
• Accruals: Revenue earned or expenses incurred in one period but not yet received or paid (e.g., accrued revenue, accrued expenses).

An overview of the Accounting Cycle

• The accounting cycle is the process of recording and summarizing financial transactions to prepare financial statements. It includes several steps, including journalizing transactions, posting to ledgers, creating trial balances, and preparing financial statements.