Understanding Business Accounts

• An account is a record in the general ledger used to collect and store similar types of transactions.
• Examples of accounts are cash, accounts receivable, accounts payable, and owner's equity.
• Accounts facilitate the preparation of financial statements, including the balance sheet, income statement, and statement of cash flows.

Types of Accounts

• Asset accounts show what a company owns.
• Liability accounts show what a company owes to others.
• Equity accounts represent the owners’ stake in the company.
• Revenue accounts represent the income generated from sales of goods or services.
• Expense accounts represent the costs incurred to generate revenue.

Chart of Accounts

• A chart of accounts provides a comprehensive list of all accounts a business uses.
• It is organized logically, providing a framework for recording financial transactions.
• The chart typically begins with asset accounts, followed by liability, equity, revenue, and expense accounts.
• A well-designed chart facilitates accurate and consistent financial reporting.

Debit and Credit

• Debit and credit are fundamental concepts in double-entry bookkeeping.
• Debit means left, and credit means right.
• In accounting, debits and credits increase or decrease an account's balance.
• The specific effect of a debit or credit depends on the account type.
• For asset and expense accounts, a debit increases the balance, while a credit decreases it.
• For liability, equity, and revenue accounts, a credit increases the balance, while a debit decreases it.
• The accounting equation (Assets = Liabilities + Equity) must always balance by ensuring total debits equal total credits for every transaction.

Normal Balance

• An account's normal balance is the side (debit or credit) on which increases to the account are recorded.
• Asset accounts usually have a debit balance.
• Liability accounts usually have a credit balance.
• Equity accounts usually have a credit balance.
• Revenue accounts usually have a credit balance.
• Expense accounts usually have a debit balance.
• Knowing the normal balance of each account type helps identify errors in recording transactions.

Journal Entries

• A journal entry records a business transaction in the general journal.
• It includes the transaction date, the accounts affected, and the debit and credit amounts.
• Journal entries provide a chronological record of all financial transactions.
• They are the basis for preparing the general ledger and financial statements.
• Each journal entry must include at least one debit and one credit, and the total debits must equal the total credits.

T-Accounts

• A T-account visually represents an individual account in the general ledger.
• It is shaped like the letter "T," with the account name at the top.
• Debits go on the left side of the T, and credits go on the right side.
• T-accounts track changes in an account balance over time.
• They are helpful for understanding the impact of various transactions on specific accounts.

General Ledger

• The general ledger is a complete record of all financial transactions of a business.
• It contains all the accounts used by the business, along with their balances.
• The general ledger is updated regularly using information from journal entries.
• It is the central repository of accounting data and is used to prepare financial statements.

Posting

• Posting transfers information from the journal entries to the general ledger.
• Account balances in the general ledger are updated with debit and credit amounts from the journal entries.
• Posting ensures the general ledger accurately reflects all financial transactions.
• It is typically done regularly, such as daily, weekly, or monthly.

Trial Balance

• A trial balance lists all accounts in the general ledger, along with their debit or credit balances.
• It is prepared at the end of an accounting period to verify that total debits equal total credits.
• An unbalanced trial balance indicates an error in the accounting records.
• The trial balance is used to prepare the financial statements.

Adjusting Entries

• Adjusting entries are journal entries made at the end of an accounting period to update certain account balances.
• They ensure that the financial statements accurately reflect the company's financial position and performance.
• Common types of adjusting entries include accruals, deferrals, and depreciation.
• Accruals recognize revenue or expenses that have been earned or incurred but not yet recorded.
• Deferrals postpone recognition of revenue or expenses received or paid in advance.
• Depreciation allocates the cost of a long-term asset over its useful life.

Closing Entries

• Closing entries are journal entries made at the end of an accounting period to close out temporary accounts.
• Temporary accounts include revenue, expense, and dividend accounts.
• The balances of these accounts are transferred to retained earnings, a permanent equity account.
• Closing entries prepare the temporary accounts for the next accounting period.

Financial Statements

• Financial statements report and summarize a business's financial performance and position.
• The main financial statements include the balance sheet, income statement, and statement of cash flows.
• The balance sheet presents a company’s assets, liabilities, and equity at a specific point in time.
• The income statement reports a company's revenues, expenses, and net income or loss for a period.
• The statement of cash flows summarizes a company's cash inflows and outflows for a period.
• Investors, creditors, and other stakeholders use financial statements to make informed decisions about a business.

Accounting Cycle

• The accounting cycle involves a series of steps that businesses follow to record, process, and report financial information.
• The steps in the accounting cycle:
  • Identify and analyze transactions.
  • Journalize transactions.
  • Post to the general ledger.
  • Prepare a trial balance.
  • Make adjusting entries.
  • Prepare financial statements.
  • Close temporary accounts.
  • Prepare a post-closing trial balance.
• The accounting cycle ensures that financial information is accurate, reliable, and timely.