As we have explained before a balance Sheet is a summary of a company's assets, liabilities and shareholders' equity at a certain point in time. Balance Sheet informs the inventors of what the company owns, owes and how much the shareholders have invested in the company.
The one of the differences between a balance sheet and an income statement is that balance sheet reflects a specific point in time and not a period of time like income statement. For example, if the balance sheet carries the date 1st of Jun. it means that all the transactions recorded on that balance sheet are pertaining to the 1st of Jun.
The main component of a balance sheet is Asset.
We are going to detail out what are the things that must be listed under Assets:
Company's cars, cash and all the supplies that the company has in hand are listed under Asset, because basically assets are the resources of the company. Account receivables also are considered as assets.
Monday, July 26, 2010
Sunday, July 25, 2010
The components of an Income statement
An Income statement shows how profitable a business has been during the period stated in it. The period of time can be a week, a month or a year.
The main components of Income statement are:
1-Revenues: The amount that has been earned
2-Expenses: The expenses needed to generate the revenue
A. Revenues
Under accrual basis of accounting the revenue is recorded when it is earned and not when the money is received. The accrual method of accounting is opposite to the other accounting method which is cash method of accounting. This is due to one of the basic accounting principles known as the revenue recognition principle.
B. Expenses
Income statement shows expenses that incurred during the period stated in the income statement regardless of when the company actually paid for the expenses.
Recording expenses with their related revenues is associated with another basic accounting principle known as the matching principle.
The main components of Income statement are:
1-Revenues: The amount that has been earned
2-Expenses: The expenses needed to generate the revenue
A. Revenues
Under accrual basis of accounting the revenue is recorded when it is earned and not when the money is received. The accrual method of accounting is opposite to the other accounting method which is cash method of accounting. This is due to one of the basic accounting principles known as the revenue recognition principle.
B. Expenses
Income statement shows expenses that incurred during the period stated in the income statement regardless of when the company actually paid for the expenses.
Recording expenses with their related revenues is associated with another basic accounting principle known as the matching principle.
Wednesday, July 14, 2010
Double Entry System
Double Entry is an old but yet a very important concept in accounting. It basically means that every financial transaction which takes place in the company will be recorded in at least two of the accounts in the accounting system.
Listing all kind of accounts that a company may need will result in a chart of accounts. The chart of accounts consists of all the accounts a company may find them useful for reporting transactions.
The number of accounts in the chart of accounts can be increased when the company grow bigger. Some accounts may be deleted if the owner of the company is not frequently using it.
The following are samples of the accounts that can be found in the chart of accounts of balance sheet and income statement:
Balance Sheet accounts:
* Asset accounts (Examples: Cash, Accounts Receivable, Supplies, and Equipment)
* Liability accounts (Examples: Notes Payable, Accounts Payable, and Wages Payable)
* Stockholders' Equity accounts (Examples: Common Stock, Retained Earnings)
Income Statement accounts:
* Revenue accounts (Examples: Service Revenues, Investment Revenues)
* Expense accounts (Examples: Wages Expense, Rent Expense, and Depreciation Expense)
Listing all kind of accounts that a company may need will result in a chart of accounts. The chart of accounts consists of all the accounts a company may find them useful for reporting transactions.
The number of accounts in the chart of accounts can be increased when the company grow bigger. Some accounts may be deleted if the owner of the company is not frequently using it.
The following are samples of the accounts that can be found in the chart of accounts of balance sheet and income statement:
Balance Sheet accounts:
* Asset accounts (Examples: Cash, Accounts Receivable, Supplies, and Equipment)
* Liability accounts (Examples: Notes Payable, Accounts Payable, and Wages Payable)
* Stockholders' Equity accounts (Examples: Common Stock, Retained Earnings)
Income Statement accounts:
* Revenue accounts (Examples: Service Revenues, Investment Revenues)
* Expense accounts (Examples: Wages Expense, Rent Expense, and Depreciation Expense)
The statement of Cash Flow
In preparing a cash flow statement, a time interval must be specified. This time interval can be three months, one year...etc. The cash flow statement shows the cash generated and used during the specified time interval.
The following are the categories where cash can be generated or used in an organization:
1. Operating activities: Income statement items are converted from the accrual basis of accounting to cash.
2. Investing activities: Recording the sale and purchase of long-term investments and property, plant and equipment.
3. Financing activities: Records the issuance and repurchase of the company's own bonds and stock and the payment of dividends.
4. Supplemental information: Records the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.
The following are the categories where cash can be generated or used in an organization:
1. Operating activities: Income statement items are converted from the accrual basis of accounting to cash.
2. Investing activities: Recording the sale and purchase of long-term investments and property, plant and equipment.
3. Financing activities: Records the issuance and repurchase of the company's own bonds and stock and the payment of dividends.
4. Supplemental information: Records the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.
Monday, July 12, 2010
Profit and Loss Statement
Profit and Loss Statement is produced to summarize the revenues, expenses and costs incurred during a specified period of time. This period is decided by the management of the company, which can be a fiscal quarter or year.
The statement provides information for the interested parties about the ability of an organization to generate profit by increasing revenue and reducing costs.
This statement is also called income statement or income and expense statement
What is meant by cost is the cost of good sold, operating expenses, tax expense and interest expense. The bottom line is net income (profit).
The statement provides information for the interested parties about the ability of an organization to generate profit by increasing revenue and reducing costs.
This statement is also called income statement or income and expense statement
What is meant by cost is the cost of good sold, operating expenses, tax expense and interest expense. The bottom line is net income (profit).
Monday, July 5, 2010
Balance Sheet
It is a summary of a company's assets, liabilities and shareholders' equity at a certain point in time. Balance Sheet informs the inventors of what the company owns, owes and how much the shareholders have invested in the company.
A basic formula that a balance sheet has to achieve is:
Assets = Liabilities + Shareholders' Equity
Assets are the group of things that the company own. For example, car, cash, house and stocks.
Liabilities are the group of things on which the company owe money. For example, car loan, a student loan and a mortgage.
Equity is the same as "net worth." It is the left over after subtracting liabilities from assets. It is the portion of assets that the company own outright, without any debt.
A basic formula that a balance sheet has to achieve is:
Assets = Liabilities + Shareholders' Equity
Assets are the group of things that the company own. For example, car, cash, house and stocks.
Liabilities are the group of things on which the company owe money. For example, car loan, a student loan and a mortgage.
Equity is the same as "net worth." It is the left over after subtracting liabilities from assets. It is the portion of assets that the company own outright, without any debt.
Sunday, July 4, 2010
Accounting System
Accounting system provides a consistent, systematic and unified method of accounting for all the financial transactions that occur during a particular financial year.
In general, accounting practices serve 2 main purposes:
1- To keep record
2- To give an accounting for all financial transactions
To summarise the above statement about accounting system, we can say:
Accounting system is the way of checking, balancing, and reconciling all the financial transactions of the year. This exercise is crucial for any company as it give an accurate picture of the company financial health. Profit and Loss report, balance sheet and cash flow statement are the fruits of accounting, which will help the individual and business owners make an informed decision about the company.
In general, accounting practices serve 2 main purposes:
1- To keep record
2- To give an accounting for all financial transactions
To summarise the above statement about accounting system, we can say:
Accounting system is the way of checking, balancing, and reconciling all the financial transactions of the year. This exercise is crucial for any company as it give an accurate picture of the company financial health. Profit and Loss report, balance sheet and cash flow statement are the fruits of accounting, which will help the individual and business owners make an informed decision about the company.
Tuesday, June 29, 2010
Assets, Liabilities, Equity, Revenue and Expenses
Assets, Liabilities, Equity, Revenue and Expenses are different accounts in the accounting system.
Assets account: Anything that add value to an entity's worth, fall under this account.
liabilities account: anything that take away value from an entity worth, falls under this account.
Equity account: any contribution of money, or financial equivalent invested by an entity in his worth.
The revenue account: All income generated will be recorded in this account.
Expense account: any financial transactions that occur, as expenditure, in generating that income.
a house can be used as an example that includes all the explained accounts:
Asset: your house has a dollar value attached to it all the time.
Liability: the loan that you took to purchase the house.
Equity: the down payment that you put to purchase the house.
Revenue: If I rent out my house then the income will be my revenue.
Expense: the cost of maintenance, insurance, repair...etc
Assets account: Anything that add value to an entity's worth, fall under this account.
liabilities account: anything that take away value from an entity worth, falls under this account.
Equity account: any contribution of money, or financial equivalent invested by an entity in his worth.
The revenue account: All income generated will be recorded in this account.
Expense account: any financial transactions that occur, as expenditure, in generating that income.
a house can be used as an example that includes all the explained accounts:
Asset: your house has a dollar value attached to it all the time.
Liability: the loan that you took to purchase the house.
Equity: the down payment that you put to purchase the house.
Revenue: If I rent out my house then the income will be my revenue.
Expense: the cost of maintenance, insurance, repair...etc
Thursday, June 3, 2010
Accounts
Accounts are basically meant to give a record of business transactions of specific item in the business.
For example, the personal check account is created to give a record of the owner of the account's financial transactions (e.g. depositing money or writing a check)
The General Ledger will contain all sort of accounts related all the items in the business.
The process of posting the financial transactions to a particular account is called journal entries.
For example, the personal check account is created to give a record of the owner of the account's financial transactions (e.g. depositing money or writing a check)
The General Ledger will contain all sort of accounts related all the items in the business.
The process of posting the financial transactions to a particular account is called journal entries.
Debits and Credits
These are the basic and most important two terms in accounting, they can basically be defined as:
Debit:
is a value added to an account.
Credit
is a value removed from an account
Every transaction that occurs in a business can either be categorised as debit or credit.
Depending on the account that you are handling, you will be clear about classifying the transaction into debit or credit. For example: if you are handling your checking account, a transaction of depositing money into your account is classified as debit, while writing a check for someone is classified as credit.
Debit:
is a value added to an account.
Credit
is a value removed from an account
Every transaction that occurs in a business can either be categorised as debit or credit.
Depending on the account that you are handling, you will be clear about classifying the transaction into debit or credit. For example: if you are handling your checking account, a transaction of depositing money into your account is classified as debit, while writing a check for someone is classified as credit.
Wednesday, June 2, 2010
Introduction
Accountancy is the way of communicating useful financial information about a business entity to some interested parties (shareholders, managers and potential investors) so that they can make wise decision.
The information basically tells the parties about the economics resources under the control of the management of the company and its performance in term of some ratios.
The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.
Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
Today, accounting is called "the language of business" because it is the way for reporting financial information about a business entity to many interested parties.
Management accounting is the type of accounting that provide information to those who are inside the company (insiders), for example: employees, managers, owner-managers and auditors. Management accounting prime objective is to provide information for managers to make management or operating decisions.
Financial accounting is the accounting type that provide information to those who are outside the company, for example: potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies.
The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
The information basically tells the parties about the economics resources under the control of the management of the company and its performance in term of some ratios.
The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.
Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
Today, accounting is called "the language of business" because it is the way for reporting financial information about a business entity to many interested parties.
Management accounting is the type of accounting that provide information to those who are inside the company (insiders), for example: employees, managers, owner-managers and auditors. Management accounting prime objective is to provide information for managers to make management or operating decisions.
Financial accounting is the accounting type that provide information to those who are outside the company, for example: potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies.
The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
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