In this article, you will learn the basics of accounting, its Principle, and fundamentals in the business. Accounting has wide scope all over the world we need accountants in every business even small or big ones.
An accountant is necessary for all organizations from sole proprietorships to a company. Accounting enables an accountant to make statements according to an organization’s position.
We have different rules of accounting and in this article, you will learn about all the basic accounting rules and how they help in a business.
We have 5 different head of accounting which covers all activities that take place within the organization or outside of an organization.
What Are The 5 Heads Of Accounting
What Is An Asset In Accounting
An asset is an item of a business that is used to run a business’s operations. An asset is something that is valuable and that a business owns or has uses of. There are two types of assets that are following,
Current Asset
Those assets which can easily convert into cash or those assets which have less than one year of life. Examples of current assets, Cash, inventories, bank, bank draft, etc.
These assets can sale within a year as these are the assets that people use and exchange frequently in a business cycle.
Non-Current Asset
Those assets which can not convert into cash easily or those assets which have more life in a business as compared to the current assets.
Examples of non-current assets, Buildings, land, vehicles, equipment, merchandise, etc.
Usually, they are depreciated except for the land, so their values frequently change with the usage of the asset.
What Is Liability In Accounting
Owes by a business means when a business is responsible for paying someone but not pay yet, that is called liability. We have two types of liabilities,
Current Liability
Those liabilities which have to pay within a year is known as current liability. Examples of current liability are payable, credit purchase and current bills, etc.
Non-current liabilities
Those liabilities can pay between 1 to 5 years or those liabilities which has to pay after one 1 year.
Examples of non-current liabilities are long-term loans, arrear bills, etc.
What Is Capital In Accounting
It means the investment by an owner in the business, we can say that without capital no business can take place and capital is the first step in setting up a business. Drawing is part of capital but it behaves as an expense.
What Is An Expense In Accounting
The money which we spent in a business or the money spent by a business for the purpose of generating profit is known as expenses. Examples of expenses are factory rent, salaries, wages, utility bills, hiring special tools, etc.
What Is Revenues/Income In Accounting
Revenue means the amount which we are generating by selling our products or services. Basically, our sales are our revenue. Examples of revenue are sales revenue, services revenue, interest revenue, etc.
Accounting Equation
The accounting equation means, Assets= Capital + liability.
How To Understand Debit And Credit Entries
Here is a very simple way I bring for you if you follow this strategy then of course you will solve the debit and credit illusion easily. Here is the trick,
- Asset
- Expense
- Drawings
When these accounts’ balance increases, they always show as a debit balance and when they decrease, it always shows a credit balance.
- Liability
- Capital
- Revenue/Income
When these accounts increase, they always show a credit balance and when they decrease, they will always show a debit balance.
These are the basics of accounting and if you learn these basics of accounting then you can solve any problem related to accounts.
What Are The Principles Of Accounting
Accounting principles are the set of rules and guidelines that every business and company must follow when making financial records such as,
- Journal entries
- Trail balance
- Adjustments
- T ledger accounts
- Statements of financial position
- Statements of profit and loss
- Cash flow
- Consolidation etc.
What Are The Fundamentals Of Using Accounting In The Business
The primary function of accounting is to record and maintain the data. It is then analyzed and summarized in different phases, so accountants can make useful information for the business owners to help them understand the performance of a business.
The stored information can be used at any time when it is needed In the business, this is only possible when a business records all transactions and events according to the rules of accounting.
Fundamentals of accounting are,
- Process of Accounting
- Reconciliation of statements
- Check and balance every event in the business
- Checking and preparing final accounts of the business
All above mentioned key points are very helpful for a business owner to know the performance of the business. A business owner can control and improve performance and profit by using these records.
Steps Of Accounting To Record The Events
- Doing identification and analyze it and recording it
- Posting the recorded transactions in the journal and then into the ledger
- Recording the adjustment entries that are identified lately
- Preparing the trial balance
- Preparing financial statements such as balance sheets and income statements.
- Closing the accounts at the year’s end.