lesson 1

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Old Definition by the American Institute of Certified Public Accountants It is the art of blank blank and blank 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.

recording classifying summarizing

New Definition: Accounting is the blank to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.

process of communicating financial information about a business entity

Accounting is not limited to profit oriented entities but also to non-stock, non profit organizations and foundations, churches and government agencies. We need to know where our funds came from and how it was spent. We need to know if our business is earning profit or incurring losses. Accounting tells us the amount of resources in our possession, our liabilities and investments. Accounting would provide tools in budgeting, financial planning, forecasting and strategic management.

reasons why everybody needs accounting

Accounting is not simply recording of transactions. We have to ensure correctness and accuracy of recorded data. We can ensure correctness and accuracy by practicing the double entry system or the debit-credit principle and the accounting equation itself. Accounting focuses on balancing procedures to ensure correctness of recorded data and transactions. Mis-balance figures is an indication of error.

how to understand the principles of accounting

what is the accounting equation

assets = liabilities + capital

WHAT IS THE EXAMPLES OF ASSETS

cash, accounts receivable notes receivable, merchandise inventory, prepaid insurance unexpired insurance, land, building, machineries and equipment

WHAT IS THE EXAMPLES OF LIABILITIES

accounts payable, notes payable, salaries payable, mortgage payable, other expenses payable, interest payable, withholding tax payable, income tax payable

WHAT IS THE EXAMPLES OF EXPENSES:

salaries expenses, utilities expenses, communication, advertising and promotion, insurance, office supplies, repair and maintenance, interest expense, taxes and licenses, miscellaneous

WHAT IS THE EXAMPLES OF INCOME OR REVENUE:

sales, service income, interest income, rent income, gain on sales of assets

When the company earned revenue, that should be given to the owner, hence, an addition to the capital. When the company incurred costs or expenses, that should be charged against the owner, hence, a deduction in capital. This means, transactions involving revenue costs and expenses affect capital as far as the computation of accounting equation is concerned.

revenue costs and expenses are part of capital