Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual. This field is crucial for decision-making, regulatory compliance, and financial transparency. Here’s a basic introduction to accounting:
Balance Sheet::Shows a company's financial position at a specific point in time, detailing assets, liabilities, and equity.
Income Statement:Provides a summary of revenues, expenses, and profits over a period, reflecting the company's operational performance.
Cash Flow Statement:Tracks the inflow and outflow of cash, highlighting how well a company manages its cash position.
This fundamental accounting principle states that every financial transaction affects at least two accounts. For example, purchasing inventory with cash decreases the cash account and increases the inventory account.
Debit (Dr):Increases asset or expense accounts, decreases liability, equity, or revenue accounts.
Credit (Cr):Increases liability, equity, or revenue accounts, decreases asset or expense accounts.
The foundational equation in accounting is Assets = Liabilities + Equity. It ensures that the balance sheet remains balanced, meaning all resources are accounted for by either debt or ownership.
Transaction Recording: Every financial transaction is documented using source documents like invoices, receipts, and bank statements.
Journal Entries: Transactions are recorded in chronological order in the journal, showing debits and credits for each transaction.
Ledger Posting: Journal entries are transferred to individual accounts in the ledger, which categorizes transactions into assets, liabilities, equity, revenues, and expenses.
Trial Balance: A trial balance is prepared to ensure that total debits equal total credits. This helps identify any discrepancies in the accounts.
Adjusting Entries: Adjustments are made for accrued and deferred items to ensure the financial statements reflect accurate and current information.
Financial Statement Preparation:Adjusted trial balance figures are used to prepare the financial statements: balance sheet, income statement, and cash flow statement.
Closing Entries: At the end of an accounting period, revenue and expense accounts are closed to retain earnings, resetting the balances for the next period.
Decision-Making:Provides critical financial information for strategic planning and operational adjustments.
Regulatory Compliance: Ensures that businesses comply with laws and regulations, avoiding legal issues and penalties.
Financial Transparency: Offers stakeholders a clear view of the company's financial health, fostering trust and confidence.
Performance Measurement: Helps in assessing the profitability and efficiency of a business, guiding performance improvements.