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Accounting Notes

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions, serving as the language of business. Key principles include GAAP, accrual basis, and the matching principle, while the accounting cycle involves identifying, recording, and preparing financial statements. Financial statements such as the income statement, balance sheet, and statement of cash flows provide insights into a company's performance and financial position.

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43 views3 pages

Accounting Notes

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions, serving as the language of business. Key principles include GAAP, accrual basis, and the matching principle, while the accounting cycle involves identifying, recording, and preparing financial statements. Financial statements such as the income statement, balance sheet, and statement of cash flows provide insights into a company's performance and financial position.

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Sachin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting Notes

Core Concepts
What is Accounting?
●​ The process of recording, classifying, summarizing, and interpreting financial
transactions.
●​ Provides information for decision-making.
●​ "The language of business."

Key Principles
●​ GAAP (Generally Accepted Accounting Principles): A common set of
accounting standards, rules, and procedures.
●​ Accrual Basis: Recognize revenues when earned and expenses when incurred,
regardless of cash flow.
●​ Matching Principle: Match expenses with the revenues they generate in the
same period.
●​ Going Concern: Assume the business will continue operating in the foreseeable
future.
●​ Cost Principle: Record assets at their historical cost.
●​ Consistency: Use the same accounting methods from period to period.
●​ Conservatism: Recognize potential losses but not potential gains.
●​ Business Entity Concept: Keep personal and business transactions separate.
The Accounting Equation
●​ Assets = Liabilities + Owner's Equity
○​ Assets: What the company owns (e.g., cash, inventory, equipment).
○​ Liabilities: What the company owes to others (e.g., accounts payable, loans).
○​ Owner's Equity: The owners' stake in the company (e.g., capital, retained
earnings).

The Accounting Cycle


1.​ Identify Transactions: Determine which business activities are financial
transactions.
2.​ Record Transactions: Create journal entries to record each transaction.
3.​ Post to Ledger: Transfer journal entry information to individual accounts in the
ledger.
4.​ Prepare Trial Balance: List all accounts and their balances to ensure debits
equal credits.
5.​ Adjusting Entries: Make entries for items not previously recorded (e.g.,
depreciation, accrued expenses).
6.​ Prepare Financial Statements: Create the income statement, balance sheet,
and statement of cash flows.
7.​ Closing Entries: Transfer temporary account balances to permanent accounts.
8.​ Post-Closing Trial Balance: Verify that debits equal credits after closing entries.

Financial Statements
Income Statement
●​ Reports a company's financial performance over a specific period.
●​ Revenues - Expenses = Net Income (or Net Loss)
●​ Key components:
○​ Revenue
○​ Cost of Goods Sold (COGS)
○​ Gross Profit
○​ Operating Expenses
○​ Operating Income
○​ Interest Expense
○​ Income Tax Expense
○​ Net Income

Balance Sheet
●​ Shows a company's financial position at a specific point in time.
●​ Assets = Liabilities + Owner's Equity
●​ Key components:
○​ Assets
■​ Current Assets (e.g., cash, accounts receivable, inventory)
■​ Non-Current Assets (e.g., property, plant, and equipment (PP&E),
intangible assets)
○​ Liabilities
■​ Current Liabilities (e.g., accounts payable, salaries payable)
■​ Non-Current Liabilities (e.g., long-term debt)
○​ Owner's Equity
■​ Common Stock
■​ Retained Earnings

Statement of Cash Flows


●​ Reports the movement of cash into and out of a company during a specific
period.
●​ Key components:
○​ Operating Activities: Cash flows from day-to-day business operations.
○​ Investing Activities: Cash flows from buying or selling long-term assets.
○​ Financing Activities: Cash flows from raising capital (e.g., debt, equity) or
repaying it.

Key Accounting Terms


●​ Account: A record used to accumulate changes in specific items (e.g., cash,
accounts receivable).
●​ Journal: A chronological record of transactions.
●​ Ledger: A collection of all accounts used by a business.
●​ Debit (Dr): The left side of an account.
●​ Credit (Cr): The right side of an account.
●​ Inventory: Goods held for sale to customers.
●​ Depreciation: The allocation of the cost of a long-term asset over its useful life.
●​ Amortization: The allocation of the cost of an intangible asset over its useful life.
●​ Receivables: Amounts due from customers.
●​ Payables: Amounts due to suppliers or others.
●​ Retained Earnings: The accumulated profits of a company that have not been
distributed as dividends.
●​ Cost of Goods Sold: The direct costs attributable to the production of the goods
sold in a company

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