Accounting Notes - Self-made PDF

**Needs for Accounting** ------------------------ Accounting is crucial for businesses of all sizes due to the following reasons: - - - - - - - **Types of Accounting** ----------------------- 1. - - - 2. - - - 3. - - - 4. - - - 5. - - -...

**Needs for Accounting** ------------------------ Accounting is crucial for businesses of all sizes due to the following reasons: - - - - - - - **Types of Accounting** ----------------------- 1. - - - 2. - - - 3. - - - 4. - - - 5. - - - 6. - - - 7. - - - The specific type(s) of accounting needed by a business depend on its size, industry, and regulatory requirements. Many businesses may utilize a combination of these types to meet their financial needs.  **Important Accounting Concepts and Principles** ------------------------------------------------ Accounting is built on a foundation of fundamental concepts and principles that ensure consistency, reliability, and comparability of financial information. Here are some of the most important ones: **Fundamental Accounting Concepts:** - - - - - - - - - **Accounting Principles:** - - - - Understanding these concepts and principles is essential for anyone involved in accounting, as they form the basis for financial reporting and decision-making.  1\. \*Project-Based Companies\*: Some companies are formed to execute a single project, such as a construction project or a specific research initiative. Once the project is completed, the company can be dissolved. This is common in industries where companies are formed specifically for a short-term goal (e.g., film production, temporary joint ventures). 2\. \*Ongoing Business\*: If the company is structured to handle multiple projects or offer long-term services, it may continue operations even after one project is completed. The company can take on new projects or shift its focus to different areas. 3\. \*Legal and Financial Considerations\*: If the company has ongoing obligations (e.g., contracts, employees, assets), dissolving it may involve legal processes, paying off debts, or handling other financial responsibilities. 4\. \*Strategic Decision\*: Ending a company may also depend on the founders\' goals. If the project was the company\'s sole focus and there's no intention to pursue other ventures, it might make sense to end the company. Otherwise, the company could pivot to new projects.  **Revenue recognition** is a fundamental accounting principle that dictates when and how revenue should be recorded in financial statements. It ensures that revenue is recognized in the correct period, matching expenses and providing a fair representation of a company\'s financial performance. **Key points to consider for revenue recognition:** 1. 2. 3. 4. **Common revenue recognition methods:** - - - **Factors affecting revenue recognition:** - - - The ***reason short-term assets are valued at either market value or cost price***, whichever is lower, is to ensure that the financial statements present a **conservative** view of the company\'s financial position. 1. 2. 3. 4. In summary, valuing short-term assets at the lower of cost or market is a conservative approach that helps ensure the financial statements present a realistic and accurate view of the company\'s financial position.  Accounting Cycle:- The **accounting cycle** refers to the systematic process of identifying, recording, and processing a company's financial transactions to prepare accurate financial statements at the end of an accounting period. It ensures that financial information is organized, complete, and accurate. The accounting cycle typically involves \*8 to 10 steps\* and follows a chronological order from the beginning of the accounting period to the generation of financial statements and closing of the books. Steps in the Accounting Cycle: 1\. **Identify and Analyze Transactions**: \- Every transaction must be identified and analyzed to determine its impact on the company's financial position. This includes sales, purchases, expenses, and other business activities. 2\. **Journalize Transactions**: \- Record each transaction in the \*general journal\* using double-entry bookkeeping (debits and credits). This step captures all financial activity in chronological order. 3\. **Post to the Ledger**: \- After journal entries are made, they are transferred (posted) to the \*general ledger\* accounts, where each account's transactions are accumulated. This step organizes transactions by account (e.g., cash, accounts receivable, expenses). 4\. **Prepare an Unadjusted Trial Balance**: \- At the end of the accounting period, an \*unadjusted trial balance\* is prepared to ensure that debits equal credits. This is a preliminary balance check before making any adjustments. 5\. \***Make Adjusting Entries**\*: \- Adjusting entries are made for items like accrued expenses, deferred revenues, and depreciation that were not captured in earlier entries. These adjustments ensure that revenue and expenses are recorded in the correct accounting period, following the \*matching principle\*. 6\. \***Prepare an Adjusted Trial Balance**\*: \- After making the adjusting entries, an \*adjusted trial balance\* is prepared. This trial balance ensures that the financial records are still balanced after adjustments have been made. 7\. \***Prepare Financial Statements**\*: \- Using the adjusted trial balance, the company prepares the key financial statements: \- \*Income Statement\* (profit and loss statement): Shows revenues and expenses to determine net income. \- \*Balance Sheet\*: Shows the company's financial position, including assets, liabilities, and equity. \- \*Statement of Cash Flows\*: Details the cash inflows and outflows from operating, investing, and financing activities. 8\. \***Close Temporary Accounts**\*: \- Temporary accounts (e.g., revenues, expenses, dividends) are \*closed\* to the retained earnings account at the end of the period. This resets them to zero so they can start accumulating again in the next period. \- The closing entries are recorded in the \*general journal\* and posted to the ledger. 9\. \***Prepare a Post-Closing Trial Balance**\*: \- After closing the temporary accounts, a \*post-closing trial balance\* is prepared to ensure that debits still equal credits and that all closing entries have been made correctly. 10\. \***Reverse Entries (Optional)**\*: \- Some companies use \****reversing entries***\* at the beginning of the new accounting period to cancel out certain adjusting entries (e.g., accruals) made in the previous period. This is an optional step to simplify the recording of transactions in the new period. **Key Principles in the Accounting Cycle:** \- \***Matching Principle**\*: Revenues and expenses are recognized in the period in which they occur, not when cash is received or paid. \- \***Accrual Accounting**\*: Most steps in the accounting cycle follow the accrual method, where transactions are recorded when they occur, not necessarily when the cash flows happen. The accounting cycle repeats every accounting period, ensuring accurate and consistent financial reporting. **Adjusting entries** are journal entries made at the end of an accounting period to ensure that a company\'s financial records are accurate. They are used to: **Record unrecognized transactions** - Adjusting entries account for any transactions that were not recorded during an accounting period, such as expenses or income that were incurred but not paid or received until a later date. **Align accounts** - Adjusting entries help to ensure that a company\'s accounts are in line with the Generally Accepted Accounting Principles (GAAP). **Ensure accurate reporting** - Adjusting entries help to ensure that a company\'s financial statements accurately report the revenues earned and expenses incurred during an accounting period. **Correct errors** - Adjusting entries are often part of the reconciliation process, which corrects errors and finalizes balances before the books are closed. Some common types of adjusting entries include: - - - The **accounting equation** is a fundamental equation in accounting that shows the relationship between a business\'s assets, liabilities, and capital. It\'s also known as the balance sheet equation. The accounting equation is the foundation of double-entry bookkeeping and the entire accounting system. The accounting equation is represented by the formula: **Assets = Liabilities + Capital**. The equation can be rearranged to find the value of capital or liabilities: **Capital = Assets -- Liabilities & Liabilities = Assets -- Capital**. The accounting equation is always in balance, meaning that each transaction has a debit and credit entry, and the total debits always equal the total credits. The accounting equation is used to prepare balance sheets, which are statements that show a business\'s assets, liabilities, and capital. Cash flow reconciliation is the process of ensuring that a company\'s cash flow statements, balance sheets, and income statements are consistent with each other. It can also involve reconciling non-GAAP measures, like EBITDA, to their GAAP-approved counterparts. Here are some things to know about cash flow reconciliation: **Reconciliation methods** - There are two methods for calculating cash flow: direct and indirect. If the direct method is used, the company must reconcile the cash flows to the income statement and balance sheet. If the indirect method is used, the cash flow from operations is already a reconciliation of the three financial statements. **Reconciliation process** To reconcile cash balances on a cash flow statement, add the net cash flow from operating, investing, and financing activities to the beginning cash balance. This should equal the ending cash balance reported on the balance sheet. **Benefits** Cash reconciliation helps to ensure that financial statements are accurate and to prevent fraud.