Basic Accounting Made Easy
Basic accounting provides the principles a company can use to record and report financial information. Companies use accounting to measure their profitability and effective use of capital. Though accounting can be quite complex, a few simple tools help start the process. Following the basic principles of accounting will lead to the more complex financial issues.
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Accounting Equation
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Financial reporting follows the basic accounting equation, which is assets equal liabilities plus owner's equity. This equation provides an internal check-and-balance system for financial reporting. Each entry recorded into the general ledger must have two parts: a debit and credit. This provides a balanced set of accounting books. For example, utility expenses will result in a debit to utilities expense and a credit to cash. The entry satisfies the accounting equation as both sides have changes from the entry.
Accounting Methods
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Companies can record transactions using the cash basis or accrual accounting method. The cash basis method records and reports transaction whenever cash changes hands. Accrual accounting requires accountants to record transactions as they occur. Under accrual accounting, no cash need change hands for the transaction to consummate. Small businesses can use either method. Publicly held firms must use accrual accounting, required by generally accepted accounting principles.
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Financial Accounts
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Accountants will record transactions into financial accounts. The accounts reside on a company's general ledger. Common accounts include asset, expense, dividend, revenue, cost of goods and equity. Each account retains specific transactions from the company's operations. For example, assets hold dollar values related to items used by companies to generate revenue. Equity accounts include information regarding stock purchases and income retained by the company.
Financial Statements
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Financial statements are the final reporting tool for accounting. The income statement reports income derived from sales less cost of goods sold and expenses. The balance sheet details a company's economic wealth determined by the assets, liabilities and equity retained by the company. The statement of cash flows reports all sources and uses of cash from the previous two financial statements.
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