Accounting Basics

Accounting Basics

FUNDAMENTAL INFORMATION YOU NEED TO KNOW

Step 1: Identify Transactions

Step 2: Record Transactions

Step 8:Closing the Books

AcCOUNTING CYCLE

The process that tracks, records and analyzes all financial activity within a business.

Step 7:Financial Statements

Step 3: Posting

Accounting Cycle

Step 4: Unadjusted Trial Balance

Step 6: Adjusted Trial Balance

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Step 5:Worksheet

The Accounting Equation, Debits vs. Credits

In every transaction there is a debit and a credit. Two accounts are always affected.

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In general these are transactions where money is flowing out of the business. They are always on the right.

Credits

In general these are transactions where money is flowing in to the business. They are always on the left.

Debits

Every Transaction

ASSETS

LIABILITIES

OWNER'S EQUITY

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Expenses

Revenues

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*Source: investopedia.com was used for some source material

What is a normal balance?

A normal balance is the side of the account that is positive or increasing.

Let's put this into action:Your company gets a loan for more cash. Cash is going up. Cash is an asset account, it increase on the DEBIT side. Since it increase on the DEBIT side, it carries a normal DEBIT balance. Since Cash is an asset account and also money is flowing in, this would be a debit to the Cash Account. Bank loans is also going up. Bank Loans would be a liability account, it will increase on the CREDIT side. Since it increases on the CREDIT side, it carries a normal CREDIT balance. Even though your loan account is going up, money is not flowing in to that account, what you OWE is increasing, not what you HAVE.

The Accounting Equation

Assets= Liabilities + Owner's Equity

This is the fundatmental equation one must remember in all accounting transactions. Every transaction affects two accounts and the equation must always be in balance.

Different ways to write the equation.

• A= L+OE
• A-L = OE
• L=OE - A