Easy Introduction to Accounting

What is Accounting?

Accounting is the process of (1) Recording, (2) Classifying (3) Summarising & interpretation of Business transactions.

Accounting Cycle 

1) Recording Business transaction ------------> in Journal 

2) Classifying Business transaction into accounts--------------------> in Ledger 

3) Summarising in the shape of------------------> Financial Statements

                          

                                                                 Accounting Cycle

The Accounting Equation:

All accounting entries in the books of account for an organisation have a relationship

based on the ‘accounting equation

                                                      Assets = Liabilities + Owner’s equity

Assets

Assets are tangible and intangible items of value which the business owns. Examples

of assets are:

· Cash

· Cars

· Buildings

· Machinery

· Furniture

· Debtors (money owed from customers)

· Stock / Inventory

Liabilities

Liabilities are those items which are owed by the business to bodies outside of the

business. Examples of liabilities are:

· Loans to banks

· Creditors (money owed to suppliers)

· Bank overdrafts

Owner’s Equity

The simplest way to understand the accounting equation is to understand what makes

up ‘owner’s equity’.

By rearranging the accounting equation you can see that Owner’s Equity is made up

of Assets and Liabilities.

Owner’s Equity = Total Assets less Total Liabilities

Owner’s Equity can also be expressed as:

Owner’s Equity = Capital invested by owner + Profits (Losses) to date

(also known as ‘Retained Earnings ’)

Rearranging the equation again, therefore:

Total Assets - Total Liabilities = Capital + Retained Earnings