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Accounting 101: The Basics

Accounting 101: The Basics

These are your three financial statements that reflect a company’s performance. Each statement is used to measure different things, and because they show up very often in accounting, it’s important you know when to use each one. Operating cash flow, or OCF, shows the cash left over after operating expenses have been subtracted. Businesses can make money in a variety of ways, but OCF is a measure of how successful a business is at bringing in revenue through their primary activities. Equity, or owner’s equity, describes the portion of your company that is owned by you and your investors.

This decrease is also called “depreciation” and is shown in the income statement as an expense. First, you sell your product or service to a customer. In addition you give him an invoice with the amount to be paid and the due date of payment. This will trigger an income (e.g. revenue) and an expense (e.g. cost of goods sold) on the income statement. Let’s have a look at an examplary income statement.

If the entries aren’t balanced, the accountant knows there must be a mistake somewhere in the general ledger. Managerial accounting uses much of the same data as financial accounting, but it organizes and utilizes information in different ways. Namely, in managerial accounting, an accountant generates monthly or quarterly reports that a business’s management team can use to make decisions about how the business operates.

You probably need to keep a record of accounts receivable and accounts payable anyway, so you are already keeping track of all the information needed to do your books on the accrual basis. If you are using a software system, there really isn’t much extra effort involved in using the accrual method. You record an expense when you receive goods or services, even though you may not pay for them until later.

Accounting Tutorial for Beginners: Learn in 7 Days

Here all business transactions are recorded, including sales, credit purchases, office expenses and income losses. Cash flow describes the inflows and outflows of cash to and from your business. Ideally, you want to have a positive cash flow.

A business produces receipts when it provides its product or service and it receives receipts when it pays for goods and services from other businesses. Received Receipts should be saved and catalogued so that a company can prove that its incurred expenses are accurate.

basic accounting

The Balance Sheet is one of the two most common financial statements produced by accountants. This section pertains to potentially confusing terms that relate to the balance sheet.

This will help you get familiar with the different types of income and expenses that are part of the basic accounting. Income Statement – A summary of a business’ performance determined by the organization’s profitability over a period of time.

  • These standards may be the Generally Accepted Accounting Principles of a respective country, which are typically issued by a national standard setter, or International Financial Reporting Standards (IFRS), which are issued by the International Accounting Standards Board (IASB).
  • These accounts hold a balance due for rent, salaries, funds owed to suppliers and any other accounts where money is owed.
  • The cash flow statement reflects a company’s cash position on hand at the end of a fiscal period.
  • Cash Basis Accounting – A method where income and expenses are recorded only with the payment of cash to the business or from the business.
  • Liabilities.
  • Using generally accepted accounting principles, accountants record and report financial data in similar ways for all firms.

One of the most important financial accounting rules is that assets equals liabilities plus stockholders’ equity. This formula applies to the balance sheet, which displays assets, liabilities and stockholders’ equity. An asset is anything the company owns that will provide future benefit, such payroll taxes as cash, accounts receivable and property. A liability is an account that shows what a company owes others, such as notes payable, long-term debt payable and short-term debt. Stockholders’ equity is the amount of money the company receives from its investors as a way to finance the company.

Managerial accounting, on the other hand, includes all the efforts made to use financial information to guide decision making. Most of the accounting terms listed above don’t help business owners analyze their business much. While they are useful to know to ensure clear communication with an accountant, there are other items that do a better job helping business owners measure success.

basic accounting

The accounting cycle refers to the process of generating financial statements. It begins with analyzing business transactions, recording them in journals, and posting them to ledgers. Ledger totals are then summarized in a trial balance that confirms the accuracy of the figures. Next the accountant prepares the financial statements and reports.

basic accounting

The balance sheet shows what the company owns, who owns the company and what the company owes others. The cash flow statement is a summary of the changes in cash during the year.

Expenses. This is the amount of assets consumed during the measurement period.

Once a customer pays their bill, the A/R balance is reduced. You can see that the initial entry in A/P is a credit, which increases the balance of that account. Once that bill has been paid, A/P is reduced by the amount of the payment, while your cash account is reduced as well. Revenue, or income, is any monies received during the course of conducting business, whether that’s selling products or services. Liabilities are anything your business owes.

21. Business (or Legal) Entity

Revenue is recognized and recorded when it’s earned, and expenses are recognized and recorded when incurred. These entries are made whether or not cash is received or paid. If assets are all the things your company possesses, the other side of the accounting equation shows who owns those things—you or someone else. If someone else owns it, it belongs in the liabilities section. Accounts receivable is the amount of money your customers or clients owe you for goods or services you’ve provided—but that they have not yet paid.

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