Introduction to Accounting and Bookkeeping
- Definition of Accounting : The process of recording, summarizing, analyzing, and reporting financial transactions of a business.
- Definition of Bookkeeping : The act of systematically recording financial transactions and maintaining financial records.
Basic Accounting Principles
- Accrual Principle: Transactions are recorded when they occur, not when cash is exchanged.
- Consistency Principle: Applying the same accounting methods over time.
- Going Concern Principle: Assumes a business will continue to operate indefinitely.
- Matching Principle: Expenses should be matched with revenues in the period in which they are incurred.
Types of Accounts
- Assets: Resources owned by a business (e.g., cash, inventory, property).
- Liabilities: Obligations owed to outsiders (e.g., loans, accounts payable).
- Equity: Owner’s claim on the business (e.g., retained earnings, capital).
- Revenue: Income earned from normal business operations.
- Expenses: Costs incurred in the process of earning revenue.
The Accounting Equation
- Assets: Resources owned by a business (e.g., cash, inventory, property).
- Liabilities: Obligations owed to outsiders (e.g., loans, accounts payable).
- Equity: Owner’s claim on the business (e.g., retained earnings, capital).
- Revenue: Income earned from normal business operations.
- Expenses: Costs incurred in the process of earning revenue.
Assets = Liabilities + Equity
Financial Statements
- Income Statement: Shows revenue and expenses over a period, resulting in net profit or loss.
- Balance Sheet: Snapshot of assets, liabilities, and equity at a specific point in time.
- Cash Flow Statement: Details cash inflows and outflows from operations, investing, and financing activities.
- Statement of Changes in Equity: Shows changes in owner’s equity over a period.
Bookkeeping Process
- Ledger: A book or database where financial transactions are recorded.
- Journal: The initial book where transactions are recorded.
- Chart of Accounts: A list of all accounts used by a business.
- Depreciation: Allocation of the cost of a tangible asset over its useful life.
- Accounts Receivable: Money owed to the business by customers.
- Accounts Payable: Money the business owes to suppliers.
Double-Entry Bookkeeping
- Every transaction affects at least two accounts.
- Debits and credits must always balance.
Common Bookkeeping Terms
- Ledger: A book or database where financial transactions are recorded.
- Journal: The initial book where transactions are recorded.
- Chart of Accounts: A list of all accounts used by a business.
- Depreciation: Allocation of the cost of a tangible asset over its useful life.
- Accounts Receivable: Money owed to the business by customers.
- Accounts Payable: Money the business owes to suppliers.
Accounting Software
- Examples include QuickBooks, Xero, and Sage.
- Automates and simplifies bookkeeping tasks.
- Provides real-time financial reporting and analysis.
Regulatory Compliance
- GAAP (Generally Accepted Accounting Principles): Standard framework of guidelines for financial accounting.
- IFRS (International Financial Reporting Standards): International accounting standards.
Internal Controls
Procedures and policies to ensure accuracy and integrity in accounting. Examples: separation of duties, regular audits, and authorization of transactions.
Tax Accounting
Preparation of tax returns and planning for future tax obligations. Understanding tax regulations and compliance.
Practical Examples
- Recording a Sales Transaction: Debit Accounts Receivable, Credit Sales Revenue.
- Recording a Purchase: Debit Inventory, Credit Accounts Payable.
- Payroll Accounting: Debit Salaries Expense, Credit Cash/Bank.
Career Pathways
- Bookkeeper: Focuses on recording daily transactions.
- Accountant: Prepares financial statements, ensures compliance, and analyzes financial data.
- Certified Public Accountant (CPA): A licensed accounting professional who can perform audits and provide tax advice.
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