A Comprehensive Look at Accounting Concepts and Practices

Posted on Feb 26, 2025 in Economy

Accounting Principles and Financial Information

Accounting is the systematic process of identifying, recording, summarizing, analyzing, interpreting, and reporting financial information.

Key Steps in the Accounting Process:

  • Identify: Recognize transactions.
  • Record: Collect information or data about transactions.
  • Summarize: Create a concise summary.
  • Analyze: Examine critically.
  • Report: Present the financial position in periodic statements.
  • Interpret: Understand the information.

Types of Accounting:

Tax Accounting

  • Characteristics: Determines the amount owed to the government for taxes. Tax rules are set by government entities.
  • Users: Businesses, government.

Managerial Accounting

  • Characteristics: No set rules, meets the needs of users, helps in making decisions.
  • Users:
    • Top Management (CEO, President, Board of Directors)
    • Middle Management (Area Manager)
    • Low Management (Team Leader, Chief, Supervisor)
    • Non-Management (Employee, Worker)

Financial Accounting

  • Characteristics: Multi-purpose reports, follows established rules, helps people outside the business.
  • Users:
    • Directly affected: Investors
    • Indirectly affected: Customers, Suppliers

Event Types (Business Transactions Involving Exchange of Money):

  • Revenue (+): Activity of selling goods or services and collecting payment.
  • Expenditure (-): Activity of buying and paying for goods or services.
  • Human Resources/Payroll (-): Activity of hiring and paying employees.
  • Production (-): Activity of converting raw materials and labor into finished goods.
  • Financing: Activity of obtaining necessary funds to run the organization, repaying creditors, and distributing profit. (Investors, Banks, Mutual Funds, Sponsors)

Asset Accounts

Assets are resources with value that an individual or business owns to provide future economic benefit.

Types of Assets:

Current Assets (Expected to Become Cash Within 1 Year)

  • Cash:
    • Cash on hand: Physical money.
    • Bank account: Money the business has in the bank.
  • Marketable Securities: Documents with monetary value.
    • Stocks: Share certificates, representing ownership in a company.
    • Bonds: Certificates of investment with extra interest from the bank.
    • Certificates of Deposit: Investment with the government, receiving extra interest.
  • Receivables:
    • Accounts Receivable: Money customers promise to pay later.
    • Notes Receivable: Document customers sign promising to pay later with interest.
    • Interest Receivable: Extra interest customers pay based on notes.
  • Inventory:
    • Raw Material: Material to transform into a product.
    • Manufacturing Supplies: Additional items needed to create a product.
    • Semi-Finished Product: Incomplete product with some value.
    • Finished Products: Ready to be sold.
  • Supplies:
    • Stationary: Office supplies.
    • Other Supplies: Cleaning supplies.
  • Prepaid Expenses:
    • Prepaid Rents
    • Prepaid Taxes
    • Prepaid Insurance

Fixed Assets

  • Fixed Assets:
    • Property (Land)
    • Building a Plant
    • Construction
    • Furniture and Equipment (for office)
    • Vehicles
    • Machinery and Equipment (for production)

Intangible Assets

  • Intangible Assets:
    • Patents: Protected from copies.
    • Copyrights: For intellectual property.
    • Trademarks: Brand names.

Liabilities Accounts

Liabilities are financial obligations of an entity arising from past transactions and occurring during the course of business operations. Banks and suppliers provide funds that the business does not own.

Types of Liabilities:

  • Current (Less than a year)
  • Long Term (More than a year)

Current Liabilities

  • Financial:
    • Bank Loans: Money the bank lends.
    • Short Term Loans: From other sources.
  • Securities Issued:
    • Bonds Issued: Certificates of investment to another company.
    • Other Securities Issued: Certificates of investment from the government.
  • Payables:
    • Accounts Payable: Money to pay suppliers later.
    • Notes Payable: Document promising to pay later with interest.
  • Accrued Expenses: Things used but not yet paid.
    • Accrued Rents
    • Accrued Taxes
    • Accrued Wages

Long Term Liabilities

  • Long Term Liabilities:
    • Mortgage: Bank loan to buy property (10-15 years).
    • Bank Loan or Lease Obligations for Vehicles (2-3 years).
    • Bank Loan or Lease Obligations for Machinery and Equipment (3-5 years).

Owners’ Equity

Owners’ Equity represents the rights to the property assets of the business. OE = Assets – Liabilities.

  • Capital or Common Stock: Investment of cash and other property by the owner.
  • Revenue: Result of the sale of merchandise, performance of services, etc.
    • Current Earnings: By sale of product.
    • Fees Earnings: For performing service.
  • Retained Earnings: Profit the owner reinvests in the business.
  • Expenses: Decrease in OE resulting from operating the business.
  • Drawings: Withdrawals of cash by the owner for personal expenses.
  • Dividends: Profit given to shareholders.

Increase in Owners’ Equity:

  • Owner’s Capital/Common Stock
  • Revenue
  • Retained Earnings

Decrease in Owners’ Equity:

  • Expenses
  • Withdrawals
  • Losses