Posted by James Financial Services Inc

Know The Building Blocks For Your Business Accounting

Know The Building Blocks For Your Business Accounting

Reporting financial statements is an art in itself and not just a routine process. There is a whole philosophy behind it all.

The business environment has become more uncertain in recent months. Lenders, investors, accountants, and even employees want to know more about the growth and stability of these companies for their individual and collective needs.

Therefore, they want to focus on the current financial situation of the company. For example, creditors generally value a company's ability to pay interest and principal, so they are naturally interested in its liquidity and solvency.

Investors also tend to focus more on cash flow, balance sheet, and income statement to help them determine the company's ability to deliver better business terms and consistent return on investment (ROI).

With so many stakeholders dependent on a company's financial statements, business owners and professional accountants need to understand the building blocks of business accounting and accounting standards.

For this reason, ACCA developed the Financial Accounting (FA) Document, which makes it even easier to acquire the relevant professional skills in financial accounting to achieve the goals of these key decision-makers.

The entire program is based on a very solid understanding of double-entry accounting and the accounting equation. Therefore, business owners and professional accountants alike who want to master the art of preparing perfect balance sheets, including technical expertise in using double-entry techniques and correctly interpreting company performance, should be conversant with this paper.


Seven building blocks of accounting every business owner and accountant should know.

Understanding the basic components of accounting will make it easier to understand more advanced accounting concepts. Here are the basic building blocks to get you started with accounting:

  • Assets

  • Credit

  • Debit

  • Expenses

  • Income

  • Liabilities

  • Owner's Equity


Income and Expenses

An income is a one-time transaction that earns you money. An example of income is the salary an employee receives at the end of the month. An income statement reads as follows:

Income

Sales Revenue from Services rendered for the Month of September

$5000

Sales Revenue from Products Sold for the Month of September

$15000

Rent Collected from occupants of a house for the Month of September

$200

An expense is a one-time transaction that takes your money. An example of an expense is buying chocolate from the store. An expense account looks like this:

Expenses

Payment of Utility Bills for the Month of September

$300

Employee Salaries for the Month of September

$1000

Purchase of New Machinery for the factory

$1800


Assets and Liabilities

An asset is simply any security you hold. So what is ‘value’? Something has value when it can be exchanged for money or when it can generate money or contribute income somehow. Something is valuable even when it can keep you from losing money.

For example, your house is good, and so is your car, as both can be exchanged (or sold) for cash. The equipment of a newspaper company is an asset because it produces newspapers that can be sold for cash. The loan you take from a bank is an asset because the bank will earn interest from you. A patent for your new invention is an asset because it can prevent competitors from copying your ideas, leading to the eventual loss of income.

In other words, an asset is anything that contributes to income. An asset account looks like this:


Assets

Office Building

$150000

Machinery

$200000

Office Furniture

$1300

Liability is the opposite of an asset. Everything you own that takes your money is a liability. For example, your bills are liabilities because you are losing money when paying them.

In other words, a liability is anything you own that will result in expenses. A liability account looks like this:

Liabilities

Money Payable to Supplier for utilities

$1500

Monthly Wages Payable to Employees

$1700

Taxes Payable to Government for Year 2020

$500


Owner's Equity

The owner's share capital is the sum of social assets owned by the owner of the business. It is computed as the difference between the values of a person's liabilities and assets. The following formula better describes the owner's capital:

Equity = assets - liabilities

So if the value of your assets is greater than the value of your liabilities, you have positive equity. If the value of assets is less than the value of debts, you have negative equity.


Debts and loans

Debts and loans describe transactions. For every transaction, there is an equal and opposite debit/credit. It is important to remember that taxes or credits are not positive or negative amounts. Entering an account is a debit or credit, not a positive or negative amount.

Asset and expense accounts grow in value when debited and decrease in value when credited—debts, equity accounts, and income decrease in debit value and increase when credited.

How do I know when to use credit or debit? We use the following table as a guide:



Increase

Decrease

Assets

Debit

Credit

Expenses

Debit

Credit

Income

Credit

Debit

Liabilities

Credit

Debit

Therefore, referring to the table above, when there is an increase in an asset, we record it as a debit item (the amount is entered in the debit column). Instead, a decrease in an asset would be recorded in the credit column.

Once you understand these basic building blocks for your business accounting, you'll be ready to position your business for greatness.


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