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• This document is an introductory guide to understanding the basics of accounting.
• It provides an overview of key accounting principles, financial statements, and the accounting cycle.

Basic Accounting Principles

• The fundamental accounting equation is Assets = Liabilities + Equity.
• Assets represent what a company owns.
• Liabilities represent what a company owes to others.
• Equity represents the owners' stake in the company.
• The going concern assumption assumes that a business will continue to operate indefinitely.
• The monetary unit assumption dictates that accounting records are kept in a stable monetary unit.
• The economic entity assumption states that the business is separate from its owners.
• The time period assumption allows businesses to report financial information over specific time intervals (e.g., monthly, quarterly, annually).
• The cost principle requires assets to be recorded at their original cost.
• The revenue recognition principle dictates when revenue should be recognized.
• Revenue is recognized when it is earned, not necessarily when cash is received.
• The matching principle requires expenses to be matched with the revenues they helped generate in the same period.
• The full disclosure principle requires companies to disclose all information that would affect the decisions of users of financial statements.
• Materiality refers to the significance of an item.
• An item is material if it is large enough to influence a decision.
• Conservatism suggests that when uncertainty exists, accountants should err on the side of caution.
• Losses should be recognized when probable.
• Gains should only be recognized when certain.

Financial Statements

• The four primary financial statements are: income statement, balance sheet, statement of cash flows, and statement of retained earnings.
• The income statement reports a company's financial performance over a period of time.
• It follows the format: Revenues - Expenses = Net Income.
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
• Assets are typically classified as current or non-current.
• Liabilities are classified as current or non-current.
• Equity represents the owners' stake in the company.
• The statement of cash flows reports the movement of cash both into and out of a company during a period.
• It is divided into three sections: operating activities, investing activities, and financing activities.
• The statement of retained earnings shows the changes in retained earnings during a period.
• Retained earnings represent the accumulated profits of a company that have not been distributed to owners.

The Accounting Cycle

• The accounting cycle is a series of steps a business takes to record and report its accounting information.
• The steps include:
• Identifying and analyzing transactions.
• Journalizing transactions.
• Posting to the ledger.
• Preparing a trial balance.
• Making adjusting entries.
• Preparing an adjusted trial balance.
• Preparing financial statements.
• Closing the books.
• Journal entries are used to record business transactions in the general journal.
• Each journal entry includes a debit and a credit.
• Debits increase asset, expense, and dividend accounts.
• Credits increase liability, equity, and revenue accounts.
• The ledger is a collection of all of a company's accounts.
• Posting involves transferring information from the journal to the ledger.
• A trial balance is a list of all accounts and their balances at a specific point in time.
• It is used to ensure that debits equal credits.
• Adjusting entries are made at the end of an accounting period to update accounts.
• Common adjusting entries include:prepaid expenses, unearned revenues, accrued expenses, and accrued revenues.
• An adjusted trial balance is prepared after adjusting entries are made.
• Closing entries are made at the end of the accounting period to transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings.
• This process prepares the accounts for the next accounting period.

Key Accounting Terms

• Assets : Resources owned by a business.
• Liabilities : Obligations of a business to others.
• Equity : The owners' stake in the business.
• Revenue : The income generated from the sale of goods or services.
• Expenses : The costs incurred to generate revenue.
• Net Income : The difference between revenues and expenses.
• Debit : An entry on the left side of an account.
• Credit : An entry on the right side of an account.
• Journal : A chronological record of business transactions.
• Ledger : A collection of all of a company's accounts.
• Trial Balance : A list of all accounts and their balances.
• Adjusting Entries : Entries made at the end of an accounting period to update accounts.
• Financial Statements : Reports that summarize a company's financial performance and position.