Fundamentals of Accounting
Accounting is the process of recording, classifying, and summarizing financial transactions in a systematic manner to provide financial information to users for decision-making. The following are the fundamentals of accounting:
- Double-Entry System: The double-entry system is a method of recording financial transactions where every transaction affects at least two accounts, with one account debited and another account credited. The double-entry system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced at all times.
- Chart of Accounts: A chart of accounts is a list of all the accounts used by a business to record its financial transactions. It helps in organizing and categorizing financial transactions.
- Recording Transactions: Transactions are recorded in journals, which are then posted to the general ledger. The journals include a sales journal, purchases journal, cash receipts journal, and cash disbursements journal.
- Financial Statements: Financial statements are reports that provide information about a company’s financial performance and position. The three primary financial statements are the income statement, balance sheet, and statement of cash flows.
- Accrual Accounting: Accrual accounting is a method of accounting where revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid. This method provides a more accurate picture of a company’s financial performance than cash accounting.
- Accounting Principles: Accounting principles are a set of guidelines that govern the preparation of financial statements. The generally accepted accounting principles (GAAP) are a set of rules and guidelines that companies must follow when preparing financial statements.
- Auditing: Auditing is the process of examining financial statements to ensure that they are accurate and complete. Audits are typically conducted by independent auditors who are not affiliated with the company being audited.
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- Auditing: Auditing is the process of examining financial statements to ensure that they are accurate and complete. Audits are typically conducted by independent auditors who are not affiliated with the company being audited.