Basic Financial Accounting

Accounting and financial statements
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Under the matching accounting principle , sales and the expenses used to produce those sales are reported in the same accounting period. These expenses can include wages, sales commissions, certain overhead costs, etc. Even if your tax return is on a cash basis, your accountant might prepare your financial reports on an accrual basis.

Similar to the matching principle, the basic accounting principle of revenue recognition accurately reports income, or revenue, when the sale was made, even if you bill your customer or receive payment at a later time. The materiality principle is one of two basic accounting principles that lets the accountant use their best judgment in recording a transaction or addressing an error. We often see the materiality principle at play when an accountant is reconciling a set of books or completing a tax return.

Beginners' Guide to Financial Statement

If the account is off by a relatively small amount in relation to the overall size of the business, the discrepancy may be deemed immaterial. Immaterial discrepancies can be disregarded, but material discrepancies must be addressed. Similarly, immaterial expenses can be recognized at the time of purchase, but material expenses must be depreciated over time.

Since businesses come in all sizes, an amount that might be significant—or material—for one business may be insignificant—or immaterial—for another. The principle of conservatism is the other principle that lets the accountant use their best judgment in a situation.

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So, not every business is required by law to comply with GAAP. However, most accountants will insist on following them, regardless of whether your business is bound by law to comply with GAAP. Also, think of these principles like a language. All in, understanding the basics of these accounting principles will help demystify some of those requests your accountant makes, or help you understand why a process is set up as it is. Now that you have a good understanding of the basic accounting principles, accounting formulas should be next on your checklist for understanding the inner workings of accounting.

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Financial statements

Offered By. Business Foundations Specialization University of Pennsylvania. About this Course , recent views.

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Course 2 of 6 in the Business Foundations Specialization. Flexible deadlines. Flexible deadlines Reset deadlines in accordance to your schedule. Hours to complete. Available languages. Chevron Left. Syllabus - What you will learn from this course. Video 9 videos. Reading 7 readings. Syllabus 10m. Frequently Asked Questions 10m. PDF files for videos 10m. Quiz 2 practice exercises. Learning check-in 2m. Homework 1 20m.

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Video 8 videos. Reading 6 readings. Quiz 1 practice exercise. Homework 2 20m. Expenses: Costs of doing business. Examples include: rent expense, telephone expense, salaries expense. It is the difference between assets see below and liabilities see below.

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This explanation of accounting basics will introduce you to some basic accounting of accounting, financial statements, and the need for accounting software. This article gives an overview of financial accounting basics for the non accountant. Its orientation is toward recording financial information.

This is the residual or left over amount when subtracting liabilities from assets. Withdrawals or Dividends: If the organization is a sole proprietorship one owner withdrawals are what the owner uses for his or her personal expenses — entails withdrawing cash from the business. If the organization is a corporation, dividends are the distributions of earnings from the company.

Many individuals categorize sole proprietorship withdrawals as an expense but they are not. They are monies taken out for any reason and business expenses are never paid for with withdrawals. Assets: What is owned by the business. Includes cash, accounts receivable what customers owe the business from a good or service provided for them by the business , inventory, supplies, equipment, land and buildings.

Liabilities: what is owed by the business to another business. Includes accounts payable short term liability , notes payable loan and mortgage payable loan on a building or land. In this video, we show you a number of examples of assets. Take a look and answer the following question.

The accrual basis of accounting states that transactions such as revenue and expenses are recorded as they occur regardless of if and when cash changes hands. The cash basis states that transactions are recorded only when cash changes hands. Here is an example of how very different results will occur depending on whether or not the accrual basis is used. Keep in mind that accrual accounting is not only preferred but required for most organizations since the cash basis is less reflective of what is actually occurring.

Example : Suppose you have a lawn mowing business in Florida and you complete yard work for your clients during the month of December. The clients are billed but do not have to pay your business until January which is the after your accounting cycle ends for the year. No since the revenue was actually earned but it will not be recorded in the current year since the clients have not paid the business for services rendered. The cash basis is easy to understand since recording transactions only happens when cash is either received or paid but it does not effectively show what actually occurred in the business.

The Basics

Small companies especially ones that do not employ a full time accountant, often use cash basis since it is simple and easy to use. Does it letter creditors, suppliers and customers know what is being earned and the expenses incurred in the correct timeframe? The accounts listed above are the cornerstones of the Financial Statements. To the right, you will see where the Financial Statements are part of the Accounting Cycle. Based on what you saw in the video and read in this chapter, match the description to the appropriate Financial Statement. As stated above, transactions are what happens in a business that have a financial impact and eventually become part of the Financial Statements.

Remember, there are six types of accounts: Revenue, Expenses, Capital, Withdrawals or Dividends, Assets and Liabilities all defined above.

30 Basic Accounting Terms, Acronyms and Abbreviations Students Should Know

Steps to Analyze Financial Transactions:. Read the transaction and figure out which two or more accounts are changing. Decipher whether each account is increasing or decreasing. Keep in mind that both can increase, both can decrease or one can increase while the other decreases. Figure out which account s is debited and which one s is credited. More on that in the next two chapters!

Answer: revenue and accounts receivable. Students often find it challenging to be able to read a transaction as seen above and know what two or more accounts are affected. So, the concept of Key Phrases was developed. When a transaction does not have the actual account name in it, try using these key phrases to decipher what the account s is. In Chapter 2 we will discuss the next steps in the accounting cycle since we only have introduced you to the transaction analysis above. In this video below, you will see some more examples of transaction analysis which is part one of the accounting cycle seen above.

So far, we have discussed the goal of financial accounting, the building blocks the accounts of the financial statements, the accounting cycle and got a glimpse of a basic way to analyze the first step of the accounting cycle financial transactions.

Now, let's take a look at a few examples of Financial Statements. Profitability is the main item being assessed in this statement.

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This is a very short video that introduces you to the Balance Sheet as well as another perspective about the Income Statement. View the video and then answer the following basic questions. In later chapters we will explore many aspects of the financial statements, what they show, what they do not show or reflect as well as some detailed analyses of some concepts including depreciation, stocks, bonds, interest accruals and many other related terms. Figure 1: Image courtesy of wikimedia , under public domain.

Skip to main content back to top hat. Book a 1-on-1 Walkthrough. Content Index. Chapter 1: Principles of Financial Accounting. Chapter 2: Framework and Types of Entities. Chapter 3: Recording Transactions. Chapter 4: Adjusting Journal Entries. Chapter 6: Service and Manufacturing Firms.