Accounting Basics that Every Accounting Student Should Know About
Accounting is the process of recording, classifying, and summarizing financial information for the purpose of making informed decisions. In order to be successful in accounting, students need to understand the basics of accounting including how to record transactions, how to classify them, and how to summarize them.
Firstly, let us understand the basic accounting equation which lays the foundation of accounting.
The basic accounting equation is: Assets=Liabilities+Equity.
It states that an organization's assets are equal to its liabilities plus its equity. This equation is used to help understand an organization's financial position and to make decisions about how to manage it.
An asset is something that has value and can be used to generate income. Examples of assets include money in the bank, stocks, and property. A liability is something that you owe and must be paid back with either money or other assets. For example, debt such as a mortgage might be considered a liability. Equity is the difference between the number of liabilities and assets on a company's balance sheet. This number reflects how much capital the company has in order to fund future operations.
Next, let us look into basic accounting principles.
Accounting principles are essential for any business or individual. They provide a framework for recording and reporting financial information.
Revenue recognition principle:
The revenue recognition principle states that an entity should recognize revenue when it receives payment for goods or services rendered. This means that an organization must determine the fair value of the goods or services received and then include this amount in its income statement.
The matching principle states that the revenue and expenses of a certain period to be reported together. This principle is important because it ensures that businesses have enough money to cover their obligations.
Full disclosure principle:
The full disclosure principle states that a company must disclose all material information to its shareholders. This includes information that could have a material effect on the company's stock price.
The objectivity principle is the idea that accounting information should be objective and unbiased. This means that the numbers in an accounting report should be accurate and reflect the true state of affairs. The principle helps to ensure that financial reports are reliable and are useful tools for decision-making.
Accrual accounting is a principle that recognizes revenues and expenses as they are earned or incurred, not when cash is received or paid. For example, if you sell your product but do not receive payment until next month, the sale is recorded in the month it took place.
The cost principle is an accounting principle that states that businesses should record assets at their original purchase price. This purchase price is known as the historical cost and the cost principle requires that this original cost be used in the business's books, instead of the current market value.
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Here is a list of basic accounting terms.
The amount of money earned by a business or individual during a specific time period.
The costs incurred by a business or individual in order to generate income.
The difference between income and expenses.
The excess of expenses over net income.
In accounting, a credit is when an entity (usually a business) owes another entity (usually a bank) money.
Debit is when a company takes money from one account and credits it to another account.
A financial statement that shows a business's assets, liabilities, and net worth at a specific point in time.
The amount of money that is subject to federal, state, and local taxes.
The income statement shows how much money the company made in each fiscal quarter (three months), and it also includes information about expenses.
The cash flow statement shows how much cash the company has available to pay its bills.
Accounting is a complex field—there is no denying that fact. However, it does not need to be that way for students who are just starting out in the industry.
Sharada Academy’s Accounting Course takes a straightforward approach to help students understand the fundamental accounting concepts in order to succeed in their professional life. Enroll today to master the skills of accounting!