Basics of Accounting
Understanding the basics of accounting is fundamental to understanding business transactions. After all, a business owner or manager needs to know if the business is making a profit in order to make certain decisions. A thorough knowledge of accounting basics will allow you to understand any financial report that crosses your desk.
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Significance
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Understanding the basics of accounting will help managers and employees alike, as well as help the company's effectiveness.
Definition
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Accounting is the process of recording and verifying transactions in order to report accurately the value of assets, liabilities and equity.
Accounting Equation
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Everything centers around the "accounting equation: " Assets = Liability + Equity, which means that if all the assets were sold, and all of the businesses' debts were paid off (liability), then the money that would be left over would revert to the owner.
Accounting Reports
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There are 3 main accounting reports: the Profit and Loss Statement, the Balance Sheet and the Statement of Cash Flows.
Debits and Credits
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To keep the accounting equation in balance, each transaction is recorded, with a debit to one account and a credit to another.
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