Accounting Basics

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to provide useful information for decision-making. It serves as the language of business, helping stakeholders understand financial health.

The primary branches are financial accounting, which focuses on external reporting; managerial accounting, for internal decision-making; tax accounting, for compliance with tax laws; and auditing, for verifying financial statements.

Primary users include investors, creditors, regulators, management, and employees. They use the information to assess profitability, liquidity, solvency, and operational efficiency.

GAAP stands for Generally Accepted Accounting Principles, a set of standardized guidelines used primarily in the U.S. for preparing financial statements to ensure consistency and comparability.

IFRS stands for International Financial Reporting Standards, a global framework for financial reporting adopted by many countries to promote transparency and comparability in financial statements.

The accounting equation is Assets = Liabilities + Owner's Equity. It represents the fundamental relationship showing that a company's resources equal claims on those resources.

Double-entry bookkeeping records each transaction with equal debits and credits to maintain the accounting equation. Every debit must have a corresponding credit, ensuring accuracy and balance.

Assets are resources owned or controlled by a business that provide future economic benefits. They are classified as current (e.g., cash, inventory) or non-current (e.g., property, equipment).

Liabilities are obligations of a business arising from past transactions, representing claims by creditors. They include current liabilities like accounts payable and long-term ones like bonds payable.

Owner's equity represents the residual interest in assets after deducting liabilities. It includes owner investments, retained earnings, and accumulated profits.

Revenue is the income earned from normal business operations, such as sales of goods or services. It is recorded when earned under accrual accounting.

Expenses are costs incurred to generate revenue, such as salaries, rent, and utilities. They reduce owner's equity when matched against revenues.