What is Accounting

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:

• Assets = Liabilities + Stockholders Equity

The foundation for the Balance Sheet starts with the Income Statement, which is:

• Net Income or Net Loss = Revenue - Expenses

The statement supported by Retained Earnings Statement, which is:

• Retained Earnings End = Retained Earnings beginning + Net Income (Net Loss) + Additional                                                  Capital – Dividends / Drawings

The presentation of Financial Statements (Balance Sheet, Income Statement, Statement of Retained Earnings, and other financial reports) guides the financial accounting or external users and management accounting or internal users of financial information.

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.