If you are new in accounting, then we have got you covered with all the basic accounting stuff in this one article.

In short, if you want to learn about the basics of accounting then you’ll love this post.

So let’s get to it.


Table Of Contents:

  • Introduction To Accounting Basics

  • System Of Record Keeping

  • Transactions

  • Reporting

  • Additional Accounting Topics

  • Frequently Asked Questions

  • Conclusion

Introduction To Accounting Basics

Let’s start with a simple easy to understand accounting definition.

“Accounting is the process of recording financial transactions in a systematic format. It helps keep track of profits and losses along with the assets and liabilities of a company.”

System Of Record Keeping

1. Assets

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Eg; land, building, stock, cash.

2. Liabilities

It is an Obligation to an Outside Party arising out of Past Transaction or Event. Eg: Bank loan taken, amount owing to Suppliers, Expenses payable etc. All liabilities need not be legal obligations. Eg: Provisions, Reserves for estimated losses. Also, some Legal Obligations are not Liabilities. Eg: Executory Contracts.


3. Equity

Represents the claim of the owners in the business. In the case of Sole Proprietorship concerns the equity belongs to only one owner. In the case of Partnership concerns, the equity belongs to a group of owners. In the case of Corporations/Companies equity represents all those sums of monies on which several shareholders have equal right.

4. Revenue


Gross Inflow of Economic Benefits during an accounting period due to the ordinary course of business resulting into an increase in Equity other than contributions by Equity Holders, measured at Fair Value either Received or Receivable. In simple terms is the Income generated from Sale of Goods or Services related to organisation’s primary operations.


What is related to Core Business is treated Operating Revenue, others Non-Operating Revenue.

5. Expenses

An expense is the cost of operations that a company incurs to generate revenue. Eg: cash paid to purchase materials.

Transactions

A business transaction is an economic event that is recorded in an organization's accounting system. Such a transaction must be measurable in money.

Some examples of transactions are:

  • Money borrowed as a loan (loan taken).

  • Money lent. (loan given)

  • Purchase of raw materials.

  • Sale of goods and services.

  • Receipt of cash.

  • Payments made to customers.

Reporting

1. Income Statement

It shows the various incomes earned and expenses incurred by the business during a specified period. It helps in arriving at the profit earned by the business or to know whether the business suffered a loss during that period.

2. Balance Sheet

A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates a business's net worth.

3. Statement Of Cash Flows

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations, from finances received in terms of equity and borrowings and income on investments made. It also includes all cash outflows that pay for business activities, investments during a given period and finance cost. 

Additional Accounting Topics

1. Cost Accounting

It deals mainly with the costs incurred by the company during the different stages of production after considering the different costs and arriving at the cost price of the product.

2. Internal Auditing

An Internal Audit is a department or an organization of people within a company that is tasked with providing unbiased, independent reviews of systems, business organizations, and processes. The role of Internal Audit is to provide senior leaders and governing bodies of an organization an objective source of information regarding the organization’s risks, control environment, operational effectiveness, and compliance with applicable laws and regulations.

3. Tax Accounting

Tax accounting refers to the rules used to generate tax assets and liabilities in the accounting records of a business or individual. Tax accounting may result in the generation of a taxable income figure that varies from the income figure reported on an entity's income statement. The reason for the difference is that tax rules may accelerate or delay the recognition of certain expenses that would normally be recognized in a reporting period.

Frequently Asked Questions

1. What are 5 basic accounting principles?

The 5 basic accounting principles are:

  1. The Revenue Recognition principle

  2. The Business Entity principle

  3. The Matching principle

  4. The Cost principle

  5. The Dual Aspect principle

2. What are the 4 types of accounting?

The 4 types of Accounting are:

  1. Corporate Accounting

  2. Public Accounting

  3. Government Accounting

  4. Forensic Accounting

3. What are the 3 golden rules of accounting?

The 3 golden rules of Accounting are very important so make sure you remember them. They are:

1. Real Account - Debit what comes in, Credit what goes out

2. Personal Account - Debit the receiver, Credit the giver

3. Nominal Account - Debit all expenses and losses, Credit all incomes and gains

4. Who is the father of accounting?

Luca Pacioli is known as the Father of Accounting. He was born in Northern Italy in the 1400's. 

5. What is the accounting cycle?

The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard process that begins when a transaction occurs and ends with its inclusion in the financial statements.

Conclusion

We hope that this blog has clarified all your doubts about the basics of accounting.

If you have any questions then feel free to ask them in the comment section below.

Also, we talk about new topics every week so stay updated and you will learn a lot.