Whether you're new to accounting or just need a refresher, here are the fundamental concepts explained in simple terms:
?? 1. What is Accounting?
- Accounting is the process of recording, summarizing, and reporting financial transactions to keep track of a company’s financial health.
?? 2. The Accounting Cycle:
- Transaction: Any financial activity, like buying supplies or paying salaries.
- Journal Entry: Recording the transaction in a journal.
- Ledger: Posting entries from the journal into specific accounts (e.g., Cash, Sales).
- Trial Balance: Summarizing all ledger accounts to ensure they balance.
- Financial Statements: Preparing key reports like the Balance Sheet and Income Statement.
?? 3. Key Financial Statements:
- Balance Sheet: Shows what the company owns (Assets) and owes (Liabilities), plus the owner’s equity.
- Income Statement (P&L): Shows the company’s revenue and expenses over a period, indicating profit or loss.
- Cash Flow Statement: Tracks the cash inflows and outflows to see how cash is being managed.
?? 4. Double-Entry System:
- Every transaction affects two accounts. For example, if you buy equipment for cash, you debit Equipment (increase) and credit Cash (decrease).
?? 5. Debits and Credits:
- Debits (Dr): Increase assets and expenses, decrease liabilities and equity.
- Credits (Cr): Increase liabilities and equity, decrease assets and expenses.
?? 6. Key Accounting Terms:
- Assets: What the company owns (e.g., cash, inventory, equipment).
- Liabilities: What the company owes (e.g., loans, accounts payable).
- Equity: The owner's share in the company (e.g., capital, retained earnings).
- Revenue: Income earned from selling goods or services.
- Expenses: Costs incurred to earn revenue.
Accounting may seem complex, but with these basics, you’re already on your way to understanding how businesses keep track of their money. Keep learning, and remember, every great accountant started with the fundamentals! ??
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