Basic Accounting Concepts for Non-Accounting Background Consultants

  • What is Accounting and Why Accounting?
  • Single Entry System of Accounting Vs Double Entry System of Accounting.
  • Different Types Of Accounts.
  • Three Main Accounting Rules.
  • Accrual basis of Accounting Vs Cash Basis of Accounting.
  • What is GAAP?
  • What are Critical Financial Statement?

What is Accounting?

Accounting is the process of recording financial transactions pertaining to a business.

Why Accounting?

You can think of accounting as a big machine that you put raw financial information into records of all your business transactions, taxes, projections, etc. that then spits out an easy to understand story about the financial state of your business.

Accounting tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Single Entry System of Accounting Vs Double Entry System of Accounting

What is Single Entry System Accounting?

The single entry system is a method of recording financial transactions where only one entry is marked for either a debit entry or credit entry for a specific operation. For example, if a customer pays cash to the enterprise, either cash account will be credited, or debtor account will be debited.

What is Double Entry System Accounting?

The double entry system ensures that for every single debit entry, a corresponding credit entry must be recorded while every credit entry is completed by filing a similar debit entry, which means that each entry has an opposite entry.

Single Entry System Vs Double Entry System

Single Entry SystemDouble Entry System
DualityBased on DualityNot Base on Duality
UserLarge CorporationSole Proprietors & Partnerships
Costs InvolvedCostlyCheap
Accounts MaintainedPersonal, Real & Nominal AccountsSimple Personal Accounts
Detection of ErrorsEssay to Detect ErrorsDifficult to Detect Errors
Preparation of Trial BalanceUsefulNot Useful
Profit and Loss AccountUsefulNot Useful
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Different Types Of Accounts

Balance Sheet Accounts

  1. Assets
  2. Liability
  3. Equity

P & L Accounts

  1. Expense
  2. Revenue

Main Accounting Rules

Personal Account Rule:-

Debit the Receiver

Credit the Giver

Real Account Rule:-

Debit What Comes In

Credit What Goes Our

Nominal Account Rule:-

Debit All Expenses and Losses

Credit All Incomes and Gains

Accrual basis of Accounting Vs Cash Basis of Accounting

Accrual basis accounting

Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. For example, you would record revenue when a project is complete, rather than when you get paid. This method is more commonly used than the cash method.

Cash basis accounting

The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable.

Accrual AccountingCash Accounting
Recognizes expenses when they’re billed (eg. when you’ve received an invoice)Recognizes expenses when cash has been spent
Recognizes revenue when it’s earned (eg. when the project is complete)Recognizes revenue when cash has been received
Taxes paid on money that you’re still owedTaxes are not paid on money that hasn’t been received yet
Required for businesses with revenue over $5 millionMostly used by small businesses and sole proprietors with no inventory
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What is GAAP?

Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.

The ultimate goal of GAAP is ensure a company’s financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

General Concepts of GAAP

  1. Principle of Regularity
  2. Principle of Consistency
  3. Principle of Sincerity
  4. Principle of Permanence of Methods
  5. Principle of Non-Compensation
  6. Principle of Prudence
  7. Principle of Continuity
  8.  Principle of Periodicity
  9. Principle of Materiality / Good Faith
  10. Principle of Utmost Good Faith

Four Basic Financial Statements

Income statement:-

Presents the revenues, expenses, and profits/losses generated during the reporting period. This is usually considered the most important of the financial statements, since it presents the operating results of an entity.

Balance sheet:-

Presents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the information presented is as of a specific point in time. The report format is structured so that the total of all assets equals the total of all liabilities and equity (known as the accounting equation). This is typically considered the second most important financial statement, since it provides information about the liquidity and capitalization of an organization.

Statement of cash flows:-

Presents the cash inflows and outflows that occurred during the reporting period. This can provide a useful comparison to the income statement, especially when the amount of profit or loss reported does not reflect the cash flows experienced by the business. This statement may be presented when issuing financial statements to outside parties.

Statement of retained earnings:-

Presents changes in equity during the reporting period. The report format varies, but can include the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses. This is the least used of the financial statements, and is commonly only included in the audited financial statement package.

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