Accounting Basics Pdf

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This explanation of accounting basics will introduce you to some basic accounting principles, accounting concepts, and accounting terminology. Once you become familiar with some of these terms and concepts, you will feel comfortable navigating through the explanations, quizzes, quick tests, video training, and other features on AccountingCoach.com.

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Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows. You will become familiar with accounting debits and credits as we show you how to record transactions. You will also see why two basic accounting principles, the revenue recognition principle and the matching principle, assure that a company's income statement reports a company's profitability.

Joe is a hard worker and a smart man, but admits he is not comfortable with matters of accounting. He assumes he will use some accounting software, but wants to meet with a professional accountant before making his selection. He asks his banker to recommend a professional accountant who is also skilled in explaining accounting to someone without an accounting background. Joe wants to understand the financial statements and wants to keep on top of his new business. His banker recommends Marilyn, an accountant who has helped many of the bank's small business customers.

At his first meeting with Marilyn, Joe asks her for an overview of accounting, financial statements, and the need for accounting software. Based on Joe's business plan, Marilyn sees that there will likely be thousands of transactions each year. She states that accounting software will allow for the electronic recording, storing, and retrieval of those many transactions. Accounting software will permit Joe to generate the financial statements and other reports that he will need for running his business.

With thousands of such transactions in a given year, Joe is smart to start using accounting software right from the beginning. Accounting software will generate sales invoices and accounting entries simultaneously, prepare statements for customers with no additional work, write checks, automatically update accounting records, etc.

By getting into the habit of entering all of the day's business transactions into his computer, Joe will be rewarded with fast and easy access to the specific information he will need to make sound business decisions. Marilyn tells Joe that accounting's "transaction approach" is useful, reliable, and informative. She has worked with other small business owners who think it is enough to simply "know" their company made $30,000 during the year (based only on the fact that it owns $30,000 more than it did on January 1). Those are the people who start off on the wrong foot and end up in Marilyn's office looking for financial advice.

If Joe enters all of Direct Delivery's transactions into his computer, good accounting software will allow Joe to print out his financial statements with a click of a button. In Parts 2 through 7 Marilyn will explain the content and purpose of the three main financial statements:

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.

Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance. Accounting also serves as a useful way for people and companies to honor their tax obligations.

The history of accounting dates back to ancient times. In the modern world, it is most closely associated with businesses' financial reporting. However, everyone can benefit from a knowledge of accounting basics.

Our accounting basics dictionary includes dozens of important terms. This guide includes accounting definitions, alternative word uses, explanations of related terms, and the importance of particular words or concepts to the accounting profession as a whole.

An accounting period defines the length of time covered by a financial statement or operation. Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters. Some organizations also use monthly periods. Each accounting period covers one complete accounting cycle. An accounting cycle is an eight-step system accountants use to track transactions during a particular period.

Accounts payable (AP) tracks money owed to creditors. Examples include bank loans, unpaid bills and invoices, debts to suppliers or vendors, and credit card or line of credit debts. Rarely, the term "trade payables" is used in place of "accounts payable." Accounts payable belong to a larger class of accounting entries known as liabilities.

Accrual basis accounting (or simply "accrual accounting") records revenue- and expense-related items when they first occur. For example, a customer purchases a $2,000 product on credit. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase. The method contrasts with cash basis accounting, which would record the $2,000 in revenue only after the money is actually received. In general, large businesses and publicly traded companies favor accrual accounting. Small businesses and individuals tend to use cash basis accounting.

For example, a company that hired an external consultant would recognize the cost of that consultation in an accrual. That cost would be recognized regardless of whether or not the consultant had invoiced the company for their services. Accounts payable and accounts receivable are accrual types. Others include accrued costs (costs incurred but not resolved during a particular accounting period) and accrued expenses (expenses or liabilities incurred but not resolved during a particular accounting period).

Cash basis accounting records revenues and expenses when the money involved in each transaction officially changes hands. It contrasts with accrual basis accounting. Accrual accounting recognizes revenues and expenses when they occur without regard to whether the associated funds have been exchanged.

A certified public accountant (CPA) is an accounting professional specially licensed to provide auditing, taxation, accounting, and consulting services. CPAs work for both businesses and individual clients.

The informal phrase "closing the books" describes an accountant's finalization and approval of the bookkeeping data covering a particular accounting period. When an accountant "closes the books," they endorse the relevant financial records. These records may then be used in official financial reports such as balance sheets and income statements.

Cost of goods sold (COGS) describes the total costs a company incurred in creating a product or providing a service. With products, the associated costs fall into three broad categories: materials, labor, and overhead. With services, costs include expenses related to employee compensation, materials, and equipment. Accountants sometimes use the alternative term "cost of sales."Accountants use the following basic formula to calculate COGS over a specific accounting period: Initial Inventory + Purchases - Ending Inventory.

In corporate accounting, dividends represent portions of the company's profits voluntarily paid out to investors. Investors are often paid in cash, but may also be issued stock, real property, or liquidation proceeds. In most cases, dividends follow a regular monthly, quarterly, or annual payment schedule. However, they can also be offered as exceptional one-time bonuses.

Double-entry systems record each financial transaction twice: once as a credit, and once as a debit. When the sum total of all recorded debits and credits equals zero, the accounting books are considered "balanced."

Businesses and organizations use a system of accounts known as ledgers to record their transactions. The general ledger (GL or G/L) is the master account containing all ledger accounts. It holds a complete record of all transactions taking place within a specified accounting period.Major examples of individual accounts in a general ledger include asset accounts, liability accounts, and equity accounts. Each transaction recorded in a general ledger or one of its sub-accounts is known as a journal entry.

Generally accepted accounting principles (GAAP) describe a standard set of accounting practices. GAAP are endorsed by organizations including the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission (SEC), among others. However, GAAP are only one of multiple such standards. One well-known alternative is International Financial Reporting Standards (IFRS).In the United States, privately held companies are not required to follow GAAP, but many do. However, publicly traded companies whose securities fall under SEC regulations must use GAAP standards. The SEC has stated that it may adopt IFRS best practices to replace GAAP in the future.

Gross profit (or gross income) defines the value of the products and services sold by a business before factoring in the cost of goods sold. If the gross profit is a negative number, it is instead called a gross loss. It contrasts with "net profit," which describes the actual profit earned after accounting for those costs.Gross margin is a related term: It specifies the value of the organization's net sales, minus the cost of goods sold. Net sales are calculated by correcting gross sales for adjustments such as discounts and allowances.

An income statement is a type of financial document businesses generate. It specifies the total revenues earned by the company in a given accounting period, minus all expenses incurred during the same period. Other terms used to describe income statements: e24fc04721