Whether you're pursuing a career in accounting, management, finance, economics, or other similar fields, understanding the basics of accounting can be an important building block for success. Here are five basic concepts covered in most introductory courses that will help you understand basic accounting concepts.
1. Balance Sheet Equation
The basic accounting equation serves as the basis for double-entry bookkeeping. Assets = liabilities + equity. This equation can also be written two other ways:
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Liabilities = Assets – Equity
Equity = assets – liabilities
The three components of this equation are:
- Assets including cash on hand, accounts receivable, current assets and fixed assets
- Liabilities including loans and credits
- Equity including deposits and profits that have not been distributed
This equation teaches us that a company's assets are always the sum of its liabilities and equity.
2. Debit and Credit
Double-entry bookkeeping is considered the most accurate form of accounting for businesses of all sizes. This system is based on the idea that every financial transaction has an equal and opposite effect on at least two accounts. Therefore, transactions are always booked in debit and in credit. The two values balance each other out.
A debit entry either increases an asset account or expense account or decreases a liability or revenue account. A credit entry increases debts or an equity account or decreases assets or an expense account. Debit entries are recorded on the left side of the balance sheet, credit entries on the right side.
3. Accounting Principles
Accounting principles are a set of rules that companies use to prepare their balance sheets. In Germany, the HGB or. the IFRS. GAAP (Generally Accepted Accounting Principles) are widely used in the U.S. The idea is that you have a consistent set of equal and accepted standards that all companies adhere to. These accounting principles give investors a certain degree of consistency when reading financial reports and comparing investment opportunities.
4. Financial Report
The financial statement is a collection of reports about a company's financial activities. It shows its ability to generate cash flow and repay debt. Companies must prepare their financial report in accordance with accounting principles.
Financial reports consist of three key reports:
- The balance sheet: this shows the assets, liabilities and equity in a given period.
- The profit and loss statement (P&L): This shows the income and expenses of a company in a given period.
- Dem cash flow: this report shows changes in the cash flow of the company in a given period.
5. Inflow – and origin principle
Companies can book their income or expense either when it accrues or when it is earned. Under the inflow principle, the profit is booked when it is received from the customer. Expenses are not booked until the actual disbursement has taken place. In the principle of origination, revenue is recognized when it is earned and expenses are recognized when they are incurred. It does not matter whether a deposit or withdrawal has already taken place. Companies usually use the principle of origination when they prepare their balance sheet, because accounting principles dictate this.
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