Basic Accounting

There are common rules and concepts that are used to govern the field of accounting. These rules are called basic accounting principles and guidelines. The financial statements which are to be distributed to the public are required to follow generally accepted accounting principles while preparing of those statements. Furthermore, if the company's stock is publicly traded, the federal law requires the company's financial statements are to be audited by the independent public accountants. Company's management and independent accountants both must verify that the financial statements and related notes to the financial statements have prepared in accordance with the GAAP.

The following are main accounting principles and guidelines.

1. Economic Entity Assumption The accountant keeps all business transactions of sole proprietorship separate from business owner's personal transactions. For accounting purposes they are considered to be two distinct entities.

2. Monetary Unit Assumption

Records are kept in money value/ monetary terms. All transactions in monetary terms are to be reflected in books.

3. Cost Principle

The amount spent on asset when an item was originally obtained are to be entered in the books of account. Whether this purchase happened last year or twenty years ago. Due to this reason the amounts shown are referred to historical cost amounts.

4. Going Concern Principle

This principle assumes that the company will continue to exist long enough to carry out its aims and commitments and will not liquidate in foreseeable future. If accountant believes that company will not be able to continue, he is required to disclose his assessment.

5. Full Disclosure Principle

If some information is important to any stakeholder like investor or lender who use the financial statements. The information should be disclosed within statement or in notes to the statement.

6. Revenue Recognition Principle

Revenues are to be recognized as soon as a product has been sold under the accrual basis of accounting, regardless of when money is actually received.

Basic accounting or accountancy is defined as the process of recording, measuring, summarizing, analyzing and reporting of all transactions. It is a systematic and comprehensive system of recording all transactions related to business. It may call the language of business.

All transaction which took place in course of business are first entered in the books of that entity then these are summarized under each head of account for analysis. At the last reporting took place in the shape of financial reports. These financial statements reflects the entity’s operations, its financial position and cash flow for a certain period of time. Basic Accounting is a main function of almost every business and it is handled an accountant or bookkeeper in small firms or by a finance departments with many employees in major companies.

These all financial reports are used to convey the information to the variety of users like creditors, investors, regulators, shareholders and management. The practitioners of accounting are called accountants.

The Accounting can be divided into numerous fields like financial accounting, management or managerial accounting, auditing, and tax accounting. Financial accounting emphases on the reporting of an entity's financial information, together with the preparation of the financial statements, to the external users of this information. The management accounting emphases on measuring information, analysis and reporting this for internal use like decision making by the management. 

The Accounting is facilitated by the accounting organizations such as standard setters, professional bodies and accounting firms. These financial statements are generally audited by the accounting firms. These are prepared in accordance with (GAAP) generally accepted accounting principles. 

BASIC ACCOUNTING EQUATION

Basic Accounting equation is called the balance sheet equation. This equation represents the relationship between assets, liabilities, and the owner's equity of an entity. This is the base for the double-entry bookkeeping system. Total debits are to be equal the total credits for each transaction. This equation can be expressed as:

Assets = Capital + Liabilities

In this equation left hand side and right hand sides are to be equal and this equation will remain balanced after the effect of each and every transaction. So it shows that every asset owned by the entity is purchased by company’s own investment or taken against liability.

Example:

A student purchases a computer for $1000. He borrows $500 from his friend and spend remaining $500 from his own earning. Now his assets are worth $1000, liabilities are $500, and equity $500. Now

Assets = Capital + Liabilities

$1000 = $500 + $500

Assets

The Assets are properties of the business. These are things that add value to the business and will bring the benefits in some form in future. For example, computers, furniture, stationery, machinery, vehicles or cash. The asset is that expenditure which results in acquiring of some property or benefit of lasting nature.

Assets are classified as:

a.         Fixed Assets: Fixed assets are the assets that are purchased for the purpose of operating business and not for resale. Such as land, building, machinery, furniture, etc.

b.         Current Asset: Current assets are the assets of business which require short time for converting into cash like debtors, bills receivables, bank balance etc.

Capital

Capital or Equity is the value of the assets that the owner owns. This is the value of the business assets that owner can lay claim to. Capital is the amount in terms of money or assets having money value which proprietor has invested in the business or can claim from firm. At the end of firm Capital is a liability towards the owner. This is so because the owner is to be treated separate from the business.

Liabilities

The Liabilities are principally debts. The amount is due to be paid to any other person or organization other than the owner is called as liability. The Liabilities are classified into following:

a.          Long-term liabilities: The liabilities which are payable after a long time generally more than one year are called long term liabilities.

Example. Long-term loans, debentures etc.

b.         Current liabilities: The liabilities which are payable in near future generally within one year.