Basics of accounting — AccountingTools

It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions.


The Big Four and many other large public accounting firms develop accounting software for themselves and for clients. The accounting cycle refers to the process of generating financial statements, beginning with a business transaction and ending with the preparation of the report. (Figure) shows the six steps in the accounting cycle. The first step in the cycle is to analyze the data collected from many sources. All transactions that have a financial impact on the firm—sales, payments to employees and suppliers, interest and tax payments, purchases of inventory, and the like—must be documented.

Consolidated Balance Sheet

Therefore, the company would have $300 of liabilities. Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.

In this case, Revenue is “earned” in the month of December as the deliveries were completed during this month. Cash Method – Revenue is recorded only when Cash is received. By putting all of these entries into the basic accounting software on a daily basis will result in quick and easy access to desired information and will be helpful for the strategic business decision-making process. Years ago, small business owners often found themselves completely lost when it came to understanding and navigating accounting software. While small business owners can use spreadsheet software, it’s really in your best interest to find accounting software that you’re comfortable using, and begin setting up your business.

FINANCING CASH FLOW; The financing cash flow explains how much cash was received from and paid to investors like debt and equity investors. Let’s have a look at an example of a balance sheet, so you get a better grasp of the basic accounting principles.

basic accounting

Gaining a basic understanding of accounting concepts will help a small business owner or manager read their company’s financial reports and gain a better understanding of their company’s operations. Payroll is the account that shows payments to employee salaries, wages, bonuses, and deductions. Often this will appear on the Balance Sheet as a Liability that the company owes if there is accrued vacation pay or any unpaid wages. A General Ledger is the complete record of a company’s financial transactions.

basic accounting

Financial statements provide you with the information needed to make both short-term and long-term decisions about your business. Debits and credits are the heart of accounting. These entries can both either increase or decrease an account balance, depending on the type of account. Double-entry accounting is the best way to ensure that your accounts remain in balance. Bookkeepers record financial transactions, while accountants provide analysis of what those transactions mean.

  • After five years—the end of the truck’s expected useful life—its carrying amount is zero.
  • The ledger totals for each account are summarized in a trial balance, which is used to confirm the accuracy of the figures.
  • The business transactions need to be counted (aka accounting 🙂 ) and categorized accordingly, so you can understand what has driven the change in your financial position.
  • If it comes to me, I would never start with presenting the income statement first.
  • Data analytics can be defined as the process of examining numerous data sets (sometimes called big data) to draw conclusions about the information they contain, with the assistance of specialized systems and software.
  • If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company.

Cash Basis Accounting – A method where income and expenses are recorded only with the payment of cash to the business or from the business. Though not the best method for accurate records, it’s a simple practice suitable for small businesses with mainly cash transactions.

Assets – Assets are firm’s economic resources. They are probable current and future economic benefits obtained or controlled by a entity as a result of past transaction or events.

Professional accountants follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements. Two important types of accounting for businesses are managerial accounting and cost accounting.

Retained Earnings will increase when the corporation earns a profit. There will be a decrease when the corporation has a net loss. This means that revenues will automatically cause an increase in Stockholders’ Equity and expenses will automatically cause a decrease in Stockholders’ Equity. This illustrates a link between a company’s balance sheet and income statement. Please note the key word “specific point in time”.

This is different from Income statement which is prepared for a period of time (for example Income Statement for the month of December). However, if a balance sheet is dated December 31, the amounts shown on the accounting profit balance sheet are the balances in the accounts after all transactions pertaining to December 31 have been recorded. Now that we have covered the Revenue or Sales, let us look at the Income Statement expenses.

However, had the above transaction been recorded on cash basis, Revenues would have been $0 for December and $1,000 for January. Under the accrual method of accounting, revenue is recorded when it is earned.

One of the main functions of a balance sheet is to give the company insight on the revenues they can expect to gain from receivables and expenses they can expect to pay from payables. It also shows the company what they own, for example, the land, buildings, and other assets they possess.

I designed this basic accounting course to give you an understanding of the basic accounting principles, transactions, and operations. Each section has many examples of real business transactions and even sample ledgers and financial statements to help you understand the concepts. This means that all the assets owned by a company have been financed from loans from creditors and from equity from investors. “Assets” here stands for cash, account receivables, inventory, etc., that a company possesses. These entries show that your cash (a balance sheet account) has increased by $1,500, and your accounts receivable have decreased by $1,500.

basic accounting

Computerized and online accounting programs now do many different things to make business operations and financial reporting more efficient. For example, most accounting packages offer basic modules that handle general ledger, sales order, accounts receivable, purchase order, accounts payable, and inventory control functions. Tax programs use accounting data to prepare tax returns and tax plans. Point-of-sale terminals used by many retail firms automatically record sales and do some of the bookkeeping.

Basics of accounting — AccountingTools

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