Accounting is the art of
recording of financial transactions, classifying and summarizing in a
significant manner and in terms of money, transactions, and events that are at
least partly financial in character, and interpreting the results thereof.
Accountancy or accounting is
the language of business, which provides financial information for management
decision making for business growth.
The basic accounting equation
that is so called Statement of Financial Position or Balance Sheet:
- Net Income or Net Loss = Revenue - Expenses
- Retained Earnings End = Retained Earnings beginning + Net Income (Net Loss) + Additional Capital – Dividends / Drawings
Financial accounting refers
to reports that are primarily prepared for external users, such as investors,
creditors, government regulatory and taxing agencies. The external financial
statements are prepared to satisfy the external reporting requirements. It must
be prepared in accordance with generally accepted accounting principles (GAAP).
Management or managerial
accounting on the other hand, refers to reports designed to meet the need of
internal users particularly stockholders and managers. The report help the
management to apply appropriate techniques and concepts the projected economic
data of an entity to assist management in establishing a plan for reasonable
economic objectives and in making of rational decisions with a view towards
achieving these objectives.
Double-entry accounting
Double-entry accounting uses a system of accounts to categorize transactions. Each transaction that is entered consists of one or more debits and credits, and the total debits must equal the total credits. For example, if you purchase a computer with initial payment of $2,000 cash in bank and a loan from your bank for another $3,000, the entries to record this transaction would be the following:
Office Equipment (Debit) $5,000
Accounts Payable $3,000
Cash in Bank 2,000
Note: The entries balance of
$5,000 debit is equal to the sum of the two credits.
The Five Types of Accounts
Balance sheet accounts:
1. Assets – Properties owned
and used in the business
2. Liabilities – Debts /
Obligations of the business
3. Equity - The owner's capital
contribution
Profit and loss accounts:
4. Revenue - The amounts
earned from the sale of goods and services
5. Expenses - Costs incurred
in the operation of business
The balance sheet accounts
are permanent accounts that carry a balance from year to year. The profit and
loss accounts are temporary accounts or nominal accounts that should be closed
at the end of the accounting year cycle. Balances of revenue and expenses
transfer to an equity account.
