Introduction to Accounting

Introduction

Accounting is the art of recording, summarizing, classifying and analyzing a variety of financial transactions. Accounting also deals with the ascertainment of how such financial transactions affect and influence the overall performance and financial position of a business, company, or organization.

Students taking accounting courses are required to demonstrate proficiency with accounting concepts, interpreting and evaluating accounting statements, systems, and reports, and providing a range of critical and analytical approaches to quantitative problems.

Concepts

Revenue

Sales of products, merchandise, and services or earnings from interest, dividends, and rents.

Expenses

Payment, either in cash, by assuming a liability, or by surrendering an asset.

Assets

– Current Assets are the key assets that a business uses up during a 12-month period and will likely not be available the following year. Examples of current assets include cash in checking, cash in savings, inventory, and prepaid insurance.
– Long Term Assets are assets that a business will use for more than 12 months. Examples of long term assets include land, buildings, accumulated depreciation (such as vehicles, furniture and other fixtures), leasehold improvements, and equipment.

Depreciation

– Accelerated Depreciation includes any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years of the life of an asset.
– Straight-line Depreciation spreads the cost evenly over the life of an asset.

Liabilities

Debts or obligations owed by one entity (the debtor) to another entity (the creditor) payable in money, goods, or services.

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities.

Methods

Cash Basis Accounting

It is a simple form of accounting. Upon receipt of payment for the sale of goods or services, a deposit is made, and the revenue is then recorded as of the date of the receipt of funds. Checks are written when funds are available to pay bills, and the expense is recorded as of the check date, regardless of when the expense was incurred.

The primary focus of cash basis accounting is placed upon the amount of cash in the bank, and the secondary focus is on ensuring that the bills are actually paid.

Accrual Basis Accounting

It is a form of accounting which matches revenues to the time period or date in which they are earned and matches expenses to the time period or date in which they are incurred. In comparison to cash basis accounting, accrual basis accounting is highly complex; however, accrual basis accounting provides much more information about a particular business. The accrual basis allows businesses to track receivables (amounts due from customers on credit sales) as well as payables (amounts due to vendors on credit purchases). This type of accounting, overall, offers a means of compiling more meaningful and comprehensive financial reports.

Double-Bookkeeping

It is the concept in accounting in which each transaction results in two entries being made in the bookkeeping records. For example, if a business buys a packet of a book of stamps, (a single purchase), the transaction results in two accounts in the bookkeeping system being changed or affected. The cash account balance would be reduced in order to show the outflow resulting from making the specific purchase and the stationary account would be increased to show that money has been spent in this category.

Principles and Guidelines

Economic Entity Assumption states that the activities of a business entity must be kept separate from the activities of the business’ owner(s) and any other business entities. This means that accountants must maintain separate accounting records for each entity, and not intermix with them the assets and liabilities of its owners or business partners.

Monetary Unit Assumption is the principle of accounting which stipulates that all businesses should have one money unit to record its transactions. This accounting assumption assumes that values can be relevantly measured in current monetary units. It is not necessary that the currency be stable or that inflation effects be negligible.

Time Period Assumption is the accounting principle which states that business profit or losses are measured on the basis of a fixed set or amount of time, such as six months or one year.

Additional Resources

Accounting Dictionary contains a complete and searchable glossary of accounting terms, concepts, principles, and guidelines.

Principles of Accounting Online Textbook provides a complete guide to accounting and is supplemented with review questions, quizzes, and relevant terminology.

Sample Test for Financial Accounting offers a sample practice test in financial accounting.

Accounting Competency Exam is a sample accounting exam compiled by the University of Michigan.

Journal of Accountancy is the publication of the American Institute of Certified Public Accountants and features articles on financial reporting and planning, auditing, taxation, technology, business valuation, and related domestic and international business issues.

The International Journal of Accounting publishes articles with the goal to promote the understanding of the present and potential ability of accounting to aid in the interpretation of international economic transactions.