Accounting 101 Basics

Basic accounting records cash transactions.
Basic accounting records cash transactions. (Image: Thinkstock/Comstock/Getty Images)

Accounting 101 or basic accounting deals with the basic concept of bookkeeping or recording transactions that occur on a daily basis. This involves all monetary transactions, such as money coming in and going out, money owed to us and money owed by us. It also allows you to manage and analyze incomes and expenses and the overall cash flow of a business through the preparation of final statements such as the income statement, balance sheet and the cash flow statement.

Debits and Credits

The double-entry method of accounting requires a debit and credit entry for every transaction. Every transaction affects two accounts -- one needs to be debited, and the other needs to be credited. The general rule of thumb is that debits increase assets, expenses, dividends and losses and decrease liabilities and equity while credits do the opposite: they decrease assets and increase liabilities, income, revenues and equity. To debit an account, record the amount on the left-hand side of the account; to credit the account, enter the amount the right-hand side. The abbreviation "dr" represents debit transactions and "cr" represents credits.

Assets and Liabilities

Assets represent what the business owns; they add financial value to the business. Liabilities are what the business owes and reduce the financial value of the business. The balance sheet records both the assets and liabilities of the business. They are often categorized as short-term and long-term assets and/or liabilities. Short-term assets, also known as current assets, represent the liquidity position of the business and include things like cash at bank, trade debtors and inventory. Fixed or long-term assets encompass items such as property and machinery. Short-term or current liabilities of the business include items such as creditors and accrued expenses, while long-term liabilities include loans and mortgages.

Year-End Statements

At the end the fiscal year, every business prepares a set of year-end statements. These statements record, manage and analyze all financial data and activities throughout the year. The income statement is one of these final statements. It outlines the incomes and expenses of a business and the overall profit or loss for a given financial period. Although used at various intervals throughout the year, the balance sheet is also a year-end statement, and as such, summarizes the assets and liabilities of the business and shows the business’ net worth at the end of the financial year. The statement of cash flows is the third financial statement used for reporting financial data and it records cash coming in and going out of the business.

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