Basics of Accounting Unit 1 PDF

Basics of Accounting Unit 1 Introduction to Financial Accounting Definition: Financial accounting is the process of recording, summarizing, and analyzing the financial transaction and further rep...

Basics of Accounting Unit 1 Introduction to Financial Accounting Definition: Financial accounting is the process of recording, summarizing, and analyzing the financial transaction and further reporting the transactions result from business operations to interested parties over a period of time. Purpose: To provide useful financial information to internal & external users (e.g., investors, creditors, and regulatory agencies). Key Concepts Accounting Equation: Assets = Liabilities + Equity Double-entry System: Each transaction affects at least two accounts, maintaining the balance of the accounting equation. Accrual Basis Accounting: Revenues and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid. Cash Basis Accounting: Revenues and expenses are recorded when cash is received only. Double entry system uses Accrual basis of Accounting. Important Accounting Principles Separate Entity: Business should be considered as separate entity from the owner. Money Measurement: All Money transactions will be the part of accounting books; non- monetary transactions have no space. Going Concern: Assumes the business will continue to operate indefinitely. Accounting Period: Business will record the transaction for a period of 12 months every time. Revenue Recognition: Revenue is recognized when earned, regardless of when cash is received. Dual Aspect: Every business transaction has two effects, thus recorded at two places. Matching: Expenses should be matched with the revenues they help to generate. Historical Cost: Assets should be recorded at their original cost. Full Disclosure Principle: Financial statements should disclose all relevant information. Consistency Principle: Companies should consistently use the same accounting methods. Materiality Principle: All significant financial information should be reported. Conservatism Principle: When in doubt, report the least optimistic estimate. Common Accounts and Their Classifications Assets: Cash, Accounts Receivable, Inventory, Prepaid Expenses, Property, Plant & Equipment, Intangible Assets. Liabilities: Accounts Payable, Notes Payable, Accrued Liabilities, Unearned Revenue, Long- term Debt. Equity: Common Stock, Retained Earnings, Additional Paid-In Capital, Dividends. Accounting Cycle 1. Transaction Analysis 2. Journal Entries 3. Posting to the Ledger 4. Trial Balance Preparation 5. Adjusting Entries 6. Adjusted Trial Balance 7. Financial Statements Preparation 8. Closing Entries 9. Post-Closing Trial Balance