When the accountings start? Accounting began because people needed to record business transaction, to know if they were being financially successful, and know how much they owned and how much they owed. Accounting was born before writing or numbers existed, some 10,000 years ago, in the area known as Mesopotamia, later Persia, and today the countries of Iran and Iraq. Around 3500B.C there is also evidence of accounting being practiced in ancient times in China, Greece, and Rome. Evidence suggests that double entry bookkeeping developed in Italy around 1200B.C. The first book written on double entry bookkeeping was written by Luca Pacioli and published in Venice in November 1494.
Accounting
Field
Financial accounting
Managerial accounting
Cost accounting
International accounting
Not-for-profit accounting
Social accounting
Financial accounting and managerial accounting are most common in the accounting field. Financial accounting is comprised of information that companies make available to the general public: stockholders, creditors, customers, suppliers, and regulatory commissions. Managerial accounting is the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process. Other fields include cost accounting, internatio0nal accounting, not-for-profit accounting, and social accounting.
Business Entities
Sole
Trader
Partnership
Company
Three Type of business entities that using accounting to make decision:
Sole trader is a business only one owner and he has the final word taking all decisions by himself. This means that the owner has unlimited liability
Partnership is owned by two or more individuals. Like sole trader, small local business such as automotive repair shops, music stores, beauty salons, and clothing stores may be organized as partnerships.
Company is organized under state or federal statutes as a separate legal entity. The ownership of a corporation is divided into shares of stock.
User of accounting information
External Users
Potential Investor
Tax inspectors
Internal Users
Internal Manager
User of accounting information falls into two categories that are external users and internal users. External users, including financial accountant from outside of the business they may be potential investors or tax inspectors who use this information for making decision. Internal can be divided into two classes one is internal managers who use this information for making routine decisions in the short term planning and controlling operations. Another class is internal manager who use this information for making non-routine decisions in the long term planning and to formulate overall policies. The types of information used include income statements, owner's equity statement, balance sheets and statements cash flow.
Accountings are important this is because accounting letting people and organizations know:
-How much they have earned this year;
- How much they earned during the last year;
- Is business improving;
- How much cash do they have;
- How much money they owe;
- How much they owe to someone else.
The accounting equation represents the basic equation associated with double-entry accounting. Essentially, the accounting equation establishes the formula for representing the relationship that exists between assets, liabilities, and owner's equity. As the most common of all balance sheet equations, the accounting equation is also fundamental to learning how to properly read and utilize a balance sheet.
Assets = Liabilities + capital
This equation is known as accounting equation. It is usual to place liabilities before owner's equity in the accounting equation because creditors have first rights to the assets.
Capital = Assets - Liabilities
The ownership interest is the residual claim, after liabilities to third parties have been satisfied. The equation expressed in this form emphasizes that residual aspect.
Another way of thinking about an equation is to imagine a balance with a bucket on each end. In one bucket are the assets minus liabilities. In the other is the capital. When the assets increase then the capital must also increase. In other way, when the profits increase capital then the assets will increase or liabilities will decrease. Every financial transaction that is accounted for will cause a change somewhere in the accounting equation, and the equation will remain in balance after every transaction.
In the accounting equation consist of two relationships that are positive relationship and negative relationship. A positive relationship exists between assets and owner's equity. For example, increase in capital by cash injection. A negative relationship exists between liabilities and owner's equity such as accrued expenses.
Accounting equation shows the financial position of a business entity at a particular date. Using the accounting equation we can know how much the business owns and owes, and the owner's interest in the business. Is a useful rule which helps when assembling the balance sheet figure.
.
Financial
Statements
Income
Statement
Balance
Sheet
Income statement also called profit and loss statement. The income statement is a financial report that shows the income earned and the expenses incurred by a business for an accounting period, based on the matching concept. The income statement also report the excess of the revenue over the expenses incurred. This excess of the revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.
One of the most important uses of income statement is that of comparing the results obtained with the results expected. In the profit of calculation we can easily to see about how much profit is made, before deducting expenses, for every rm1 of sales revenue. The account in which profit is calculated is split into two sections one is gross profit, and net profit.
In the income statement it shows the relationship between revenues and expenses. That has two relationships between revenues, expenses and owner's equity. A positive relationship exists between revenues and owner's equity as revenue increases the value of the assets of a business entity. A negative relationship exists between expenses and owner's equity as expenses use up the assets of a business entity. Hence, the effect of revenue earned and expenses incurred during the month for Net Solutions were shown in the equation as increases and decreases in owner equity.
Balance Sheet is a financial report that shows the financial position of a business at a particular date and it shows the value of the assets, liabilities and owner's equity. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
The balance sheet is split into two parts. One part is a statement of fixed assets, current assets and the liabilities. Another part is a statement showing how the Net Assets have been financed, for example through share capital and retained profits.
The Companies Act requires the balance sheet to be included in the published financial accounts of all limited companies. In reality, all other organisations that need to prepare accounting information for external users will also product a balance sheet since it is an important statement of the financial affairs of the organisation. This is because the balance sheet is a part of the annual report and other documents related by the company. It is used to ensure that the company is complying by the laws, tax rules and so on.
Income statement and balance sheet have many different. For an example, income statement describes the current year performance while balance sheet describes the overall position of company right from the starting year of business to current year. Not only that, income statement provide the current year net profit information while balance sheet provide information about the overall assets and liabilities of company applied in the business. Beside that, in the income statement it shows the relationship between revenues and expenses while balance sheet it shows the value of the assets, liabilities and owner's equity. Consequently, Income statement and balance sheet are totally different but both of the statement are important though the business organisation.
The following example shows some of the common elements of the Balance sheet:
The following example shows some of the common elements of the Income Statement:
Sample Company
Income Statement
January 1, xxxx to December 31, xxxx
Income
Gross Sales
346,400
Less returns and allowances
1,000
Net Sales
345,400
Cost of Goods
Merchandise Inventory, January 1
160,000
Purchases
90,000
Freight Charges
2,000
Total Merchandise Handled
252,000
Less Inventory, December 31
100,000
Cost of Goods Sold
152,000
Gross Profit
193,400
Interest Income
500
Total Income
193,900
Expenses
Salaries
68,250
Utilities
5,800
Rent
23,000
Office Supplies
2,250
Insurance
3,900
Advertising
8,650
Telephone
2,700
Travel and Entertainment
2,550
Dues & Subscriptions
1,100
Interest Paid
2,140
Repairs & Maintenance
1,250
Taxes & Licenses
11,700
Total Expenses
133,290
Net Income
$60,110
The balance sheet shows items comprising of assets, liabilities and capital.
Assets
Fixed
Assets
Current
Asset
Premises
Machinery
Motor Vehicle
Cash in hand
Cash at bank
Debtors
Assets are possessions of value owned by a business because they bring future benefits to the business entity. Assets include land, buildings, equipment and anything else a business owns that can be given a value in money terms for the purpose of financial reporting. Assets are commonly divided into classes for presentation in the balance sheet. Two of these classes are fixed asset and current asset.
Fixed asset is an asset which is intended to be of a permanent nature and which is used by the business to provide the capability to conduct its trade. Examples for the fixed asset are premises, machinery, motor vehicles, office equipment, fittings and fixtures and furniture.
Current assets is cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less, through the normal operations of the business. These can be seen in the operating or working capital cycle it is a process of buying goods until cash is received from the resale of the goods. The operating cycle show that cash is converted into stock when goods are bought. Stock is converted into cash when it is sold for cash and the amount owed by debtors is converted into cash when debts are settled. Examples for the current asset are cash in hand, cash at bank, debtors, stock and prepayments.
Liabilities
Current
Liabilities
Long-term
Liabilities
Bank Overdraft,
Creditors
Bank loan
Mortgages
Liabilities are amounts owed by the business to outside parties. Examples for the liabilities are creditors, loans and outstanding expenses. Liabilities are business obligations that represent the claims by the external parties against the business assets. In the event of nonpayment, creditors can force the business to liquidate and be paid the amounts due to them before any claims by the owners. The most common classes of liabilities are current liabilities and long-term liabilities.
Current liabilities are liabilities that will be due within a short time and that are to be paid out of current assets. Examples for the current liabilities include bank overdraft, creditors and accrued expenses.
Long-term liabilities are amounts borrowed from banks or other institutions that will not be repaid within one year from the balance sheet date. Examples include bank loans, mortgages and debentures.
Capital also known as owner's equity. Owners' equity is the ownership right of the owner of the entity in the assets that remain after deducting the liabilities. Owners' equity also can define as investment made by the owner and it represents the owner's interest in the business. If the total revenues are greater than the total expenses the difference is the net income. A net loss is incurred if the total expense is greater than the total revenues. Transferring the net balance of the revenue and expense accounts will affect the owner's capital account.
Revenues > Expenses = Profit
Revenues < Expenses = Loss
Sample Balance Sheet:
Example Company
Balance Sheet
December 31, 2007
ASSETS
LIABILITIES
Current Assets
Current Liabilities
Cash
$ 2,100
Notes Payable
$ 5,000
Petty Cash
100
Accounts Payable
35,900
Temporary Investments
10,000
Wages Payable
8,500
Accounts Receivable - net
40,500
Interest Payable
2,900
Inventory
31,000
Taxes Payable
6,100
Supplies
3,800
Warranty Liability
1,100
Prepaid Insurance
1,500
Unearned Revenues
1,500
Total Current Assets
89,000
Total Current Liabilities
61,000
-
Investments
36,000
Long-term Liabilities
Notes Payable
20,000
Property, Plant & Equipment
Bonds Payable
400,000
Land
5,500
Total Long-term Liabilities
420,000
Land Improvements
6,500
Buildings
180,000
Equipment
201,000
Total Liabilities
481,000
Less: Accum Depreciation
(56,000)
Prop, Plant & Equip - net
337,000
-
Intangible Assets
STOCKHOLDERS' EQUITY
Goodwill
105,000
Common Stock
110,000
Trade Names
200,000
Retained Earnings
229,000
Total Intangible Assets
305,000
Less: Treasury Stock
(50,000)
Total Stockholders' Equity
289,000
Other Assets
3,000
-
Total Assets
$770,000
Total Liabilities & Stockholders' Equity
$770,000
Accounting cycle
Step 1: analyzing the transaction
↓
Step2: journalizing the transaction
↓
Step3: post the transaction to the ledger accounts
↓
Step4: preparing a trial balance
↓
Step5: journalizing adjusting entries
↓
Step6: post adjusting entries to the ledger accounts and prepare an adjusted trial balance.
↓
Step7: preparing the financial statements
- Income statement
- Balance sheet
- Statement of owner's equity
↓
Step8: journalizing and post closing entries.
↓
Step9: prepare a post-closing trial balance
Original
Entry
Double Entry Accounts
Source documents
Double Entry
Trial balance
Income Statement
Balance sheet
The Accounting Cycle is a series of steps which are repeated every reporting period. That is the process begins with analyzing and journalizing transactions and ends with the post-closing trial balance. The most important is accounting cycle is the financial cycle.
The accounting cycle give structure to accounting or bookkeeping and has nine basic steps.
First step in the accounting cycle is analyzing the transaction. Analyzing the transaction is to determine the transaction amount, which accounts are affected, and in which direction. Example: The invoice for the purchase of the paper is for a total of $100, on credit. We must then decide which accounts are affected accounts payable, inventory, supplies and cash.
The rules of debit and credit apply to accounts.
Accounts
Debit
Credit
Assets
Increase
Decrease
Liabilities
Decrease
Increase
Capital
Decrease
Increase
Drawings
Increase
Decrease
Revenues
Decrease
Increase
Expenses
Increase
Decrease
Second step in the accounting cycle is journalizing the transaction. Journalizing the transaction is recorded in the journal as a debit and credit. For an example, the increase in the asset, which is reported on the left side of the balance sheet, is debited to the cash account.
Third step in the accounting cycle is post the transaction to the ledger accounts. Each journal entry has to be posted to the ledger. A ledger is simply a collection of all accounts it shows all of the number detail about detail about a company's accounts. A simple form of ledger is a T-account.
Fourth step in the accounting cycle is preparing a trial balance. A trial balance is calculated to verify that the sum of the debits is equal to the sum of the credits. The information used in a trial balance comes from the ledger. The account balances from the ledger is used to create the trial balance.
General Journal
Date
Date
Description
Debit
Credit
2009
April
1
Bank
20,000
Capital
20,000
Paid up capital
5
Office equipment
800
Bank
800
Purchase office equipment
8
Purchase
6,000
Accounts Payable
6,000
Purchased goods
20
Account Receivable
9,600
Sales
9,600
Credit sales
27
Cash
1,700
Sales
1,700
Received cash sales
30
Salary Expense
2,500
Bank
2,500
Paid salaries
General ledger
Capital
2009
RM
2009
RM
April
30
Bal c/d
20,000
April
1
Bank
20,000
20,000
20,000
Office Equipment
2009
RM
2009
RM
April
5
Bank
800
April
30
Bal c/d
800
800
800
Bank
2009
RM
2009
RM
April
1
capital
20,000
April
5
Office Equipment
800
30
Salary
2,500
30
Bal c/d
16,700
20,000
20,000
Cash Account
2009
RM
2009
RM
April
27
Sales
1,700
April
30
Bal c/d
1,700
1,700
1,700
Account Receivable
2009
RM
2009
RM
April
Sales
9,600
April
30
Bal c/d
9,600
9,600
9,600
Sales
2009
RM
2009
RM
April
30
Bal c/d
11,300
April
20
Account receivable
9,600
27
Cash
1,700
11,300
11,300
Salary Expense
2009
RM
2009
RM
April
30
Cash
2,500
April
30
Bal c/d
2,500
2,500
2,500
Account Payable
2009
RM
2009
RM
April
30
Bal c/d
6,000
April
8
Purchase
6,000
6,000
6,000
Purchases
2009
RM
2009
RM
April
8
Account payable
6,000
April
30
Bal c/d
6,000
6,000
6,000
Trial Balance
Debit(RM)
Credit(RM)
Capital
20,000
Bank
16,700
Office Equipment
800
Cash
1,700
Account Receivable
9,600
Sales
11,300
Salary Expense
2,500
Account Payable
6,000
Purchases
6,000
37,300
37,300
Fifth step in the accounting cycle is journalizing adjusting entries. Adjusting entries are made for accrued and deferred items. The entries are journalized and posted to the T-accounts in the ledger. Adjusting entries involve bringing an asset or liability account balance to its proper amount and updating the corresponding revenue or expense account. Example: If there were any accrued interests or salaries that need to be adjusted this is the time to do it in preparation for the financial statements.
Sixth step in the accounting cycle is post adjusting entries to the ledger accounts and prepare an adjusted trial balance. After the adjusting entries have been posted, another trial balance, called the adjusted trial balance, is prepared. The purpose of the adjusted trial balances before we prepare the financial statements. If the adjusted trial balance does not balance, an error has occurred.
Seventh step in the accounting cycle is preparing the financial statements. The adjusted trial balanced is an aid in preparing the income statement, the statement of owner's equity, and the balance sheet. The financial statements must be prepared in a very specific order. This order is important because information provided in the income statement is used in the statement of owner's equity, and information from the statement of owner's equity is used in the balance sheet.
Eighth step in the accounting cycle is journalizing and post closing entries. Closing entries is a process that transfers the balances of the temporary accounts to owner equity. Examples for the temporary accounts are revenues and expenses. After the closing entries have been posted to the ledger and the balance in the capital account will agree with the amount reported on the statement of owner's equity and the balance sheet. In additional, the revenue, expense, and drawing accounts will have zero balances. A final trial balance is calculated after the closing entries are made.
The last accounting procedure for a period is to prepare a post-closing trial balance after the closing entries have been posted. The purpose of the post-closing trial balance is to make sure that the ledger is in balance at the beginning of the next period. The accounts and amounts should agree exactly with the accounts and amounts listed on the balance sheet at the end of the period.
The complete accounting cycle assures when done honestly and correctly a generally accepted snapshot of the financial situation of a company. It also helps regulators, investors and decision makers by providing a standardized tool that can be use in their duties.
In conclusion, accounting is important in our personal life, even though we may not become an accountant. Accounting can help us to make good personal and business decisions and in the accounting cycle let me know more details about the accounting process. Accounting is the conscious of the business world. Accounting is such an important aspect to any business is that accountants are responsible for determine the present and future economic stability of the organization.
