Introduction to Accounting

• Accounting involves recording, classifying, summarizing, and interpreting financial transactions.
• It tracks a company's financial health, ensures records are accurate, current, and compliant.

Key Functions of Accounting

• Recording: Maintaining detailed records of financial transactions like sales, purchases, and expenses.
• Classifying: Organizing transactions into categories such as assets, liabilities, revenues, and expenses.
• Summarizing: Preparing financial statements like balance sheets and income statements to show the company's financial position.
• Reporting: Providing financial information to stakeholders like managers, investors, and tax authorities for decision-making.
• Analyzing: Interpreting financial data to evaluate performance, profitability, and financial health.

The Accounting Cycle

• The accounting cycle records and processes financial transactions over a period, creating financial statements.
• It ensures financial records are accurate and complete.

Steps of the Accounting Cycle

• Identify Transactions: Identify and document all financial transactions, like sales, purchases, and payments, during the accounting period.
• Record Transactions in the Journal: Record each identified transaction in the journal as a journal entry, using the double-entry system (debit and credit).
  • Buying office supplies on credit is recorded as a debit to Supplies and a credit to Accounts Payable.
• Post Journal Entries to the Ledger: Transfer journal entries to the general ledger, which contains accounts like Cash, Accounts Payable, and Revenue; each account shows debits and credits.
• Prepare an Unadjusted Trial Balance: Prepare a list of all ledger accounts and their balances to ensure total debits equal total credits.
• Make Adjusting Entries: Made for items unrecorded during the period, for accurate financial statements reflecting depreciation, unpaid expenses and unearned revenue.
• Prepare an Adjusted Trial Balance: Prepared after adjusting entries to ensure debits equal credits, serving as the starting point for financial statements.
• Prepare Financial Statements: Prepared after adjusted trial balance is verified.
  • Income Statement: Shows profitability with revenues and expenses.
  • Balance Sheet: Displays financial position with assets, liabilities, and equity.
  • Cash Flow Statement: Summarizes cash inflows and outflows.
• Close Temporary Accounts: At the end of the accounting period to prepare for the new one.
  • Balances are transferred to the Retained Earnings account on the balance sheet, resetting them to zero.
• Prepare a Post-Closing Trial Balance: This ensures the books are balanced after closing temporary accounts.
  • It includes only permanent accounts, with all temporary accounts closed.
• Reversing Entries (Optional): Some businesses make reversing entries at the start of the next period to reverse certain adjusting entries.

Debits and Credits - The Double-Entry System

• Accounting uses a double-entry system, recording dual effects of transactions with corresponding debit and credit entries.
• Each transaction affects at least two accounts, where total debits must equal total credits.

T-Account

• A T-account is a visual representation of individual accounts, shaped like a "T" with the account title at the top.
• The left side is for debits, and the right side is for credits.

Components of a T-Account

• Account Title: The name of the account, such as Cash or Accounts Payable.
• Debit Side (Left Side): Increases assets or expenses and decreases liabilities or equity.
• Credit Side (Right Side): Increases liabilities, equity, or revenue and decreases assets or expenses.

Rules to Remember

• Assets: Increase on the Debit side, decrease on the Credit side.
• Liabilities: Increase on the Credit side, decrease on the Debit side.
• Equity: Increase on the Credit side, decrease on the Debit side.
• Revenue: Increase on the Credit side, decrease on the Debit side.
• Expenses: Increase on the Debit side, decrease on the Credit side.

Types and Effects of Transactions

• Source of Assets (SA): An asset account and a claims account (liabilities or equity) increase with examples like purchasing supplies on account.
• Exchange of Assets (EA): One asset increases while another decreases, such as acquiring equipment for cash.
• Use of Assets (UA): Asset and corresponding claims account decreases, for instance, settling accounts payable or paying salaries.
• Exchange of Claims (EC): One claims account increases while another decreases, such as receiving a utilities bill but not paying it.