Test Your Accounting Knowledge

Introduction to Accounting and Financial Statements

• Accounting is the process of recording financial transactions, primarily through double-entry bookkeeping.
• Transactions can be recorded on a cash basis or accrual basis, with the latter recording income and expenses once a benefit has been given or received.
• Double-entry bookkeeping involves recording two separate and distinct aspects of each transaction in separate accounts, with one recording the debit and the other recording the credit.
• The ledger is a daily record of business transactions, with separate ledgers kept for different accounts.
• The process of transferring entries from the journal to the ledger is known as posting, with the ledger balanced to prepare financial statements.
• The trial balance is a list of balances obtained from the ledger of accounts at a certain date and is used to test the adequacy of double-entry posting before preparing final accounts.
• Financial statements include the statement of financial position (balance sheet), statement of comprehensive income (income statement), statement of cash flow, statement of change in equity, and explanatory notes.
• The balance sheet shows the value of a company's assets and liabilities at a particular point in time, with net worth (equity) being the difference between the two.
• The income statement shows revenue, expenses, and net income over a period of time, with different subtotals representing different aspects of the business.
• The statement of cash flow represents a company's cash receipts and payments over a period of time.
• The statement of change in equity shows the main events that gave rise to a change in net worth, with the change in equity balancing the balance sheet.
• Explanatory notes accompany financial statements and clarify material accounting principles, accounting policies, management estimates, and significant business events.