Understanding Basic Accounting Principles and Practices

Posted on Aug 28, 2024 in Mathematics

What is Accounting?

Accounting is the practice of recording, classifying, and summarizing financial transactions to interpret business performance and solvency. This data provides insights into cash flow, sales trends, costs, and expenses, ultimately reflecting the company’s financial capacity.

Functions of Accounting

  1. Develop financial information that reflects management’s performance.
  2. Review and evaluate management performance to provide an objective opinion on financial statements and ethical practices.
  3. Design, improve, and document accounting and management information systems.
  4. Analyze economic performance, identify critical areas, and suggest actions for improvement.
  5. Conduct studies on economic and financial problems affecting businesses and institutions.

Common Accounting Books

  1. Journal
  2. Inventory and Balance Book
  3. Sales Tax Book
  4. Purchases VAT Book
  5. Minute Book

Key Articles from the Commercial Code

Article 25

Dealers are required to maintain accounts and correspondence, including:

  1. The Journal
  2. The Ledger or Accounts
  3. The Book of Balances
  4. The Letter Book of Letters

Article 27

The Journal must chronologically record daily business operations, detailing the nature and circumstances of each transaction.

Article 29

Upon starting a business, merchants must record an estimated statement of all assets (movable and immovable), liabilities, and capital in the Book of Balances. At the end of each year, a general balance of all business activities must be formed in this book, adhering to the responsibilities outlined in Book IV of this Code.

Article 31

Traders are prohibited from:

  1. Altering the order and date of recorded transactions.
  2. Leaving blanks within or after entries.
  3. Making interlineations, erasures, or amendments to entries.
  4. Deleting entries or parts thereof.
  5. Tearing pages, altering binding or foliatura, and damaging any of the books.

Understanding Inventory, Assets, Liabilities, and Capital

The initial accounting task for a company is to determine the value of its assets, liabilities, and capital through an inventory process. This detailed assessment provides a snapshot of the company’s financial position.

Definitions

  • Assets: Everything the business owns or is owed.
  • Liabilities: Everything the business owes to others.
  • Capital: The owner’s equity in the business; what the business owes to the owner.

Changes in the Inventory Equation

When analyzing changes in the inventory equation (Assets = Liabilities + Capital), consider these properties:

  • Every transaction affects at least two components of the equation.
  • Each element can either increase or decrease.
  • Changes in asset values will offset each other.
  • Changes in liability values will offset each other.
  • Changes in assets and liabilities will either both increase or both decrease.
  • Capital changes reflect profits or expenses.

Further Clarification

  • Capital: Money or property owned by an individual, expressed in monetary terms.
  • Assets: All property and rights owned by the company.
  • Liabilities: All debts and obligations owed by the company.
  • Inventory: Techniques used to organize, control, and update information related to inventory (purchases, sales, discounts, losses, costs, physical inventory, etc.). This involves methods like periodic inventory and perpetual inventory, along with valuation methods such as FIFO, LIFO, and average cost.

Accounting Techniques

Understanding the following terms is crucial for accurate accounting:

  • Debit (Dr.): The left side of an account.
  • Credit (Cr.): The right side of an account.
  • To Debit: To record an amount on the debit side of an account.
  • To Credit: To record an amount on the credit side of an account.
  • Debtor Account: An account with a debit balance.
  • Creditor Account: An account with a credit balance.
  • Debit Entries: Entries made on the debit side.
  • Credit Entries: Entries made on the credit side.
  • Debit Total: The sum of all debit amounts in an account.
  • Credit Total: The sum of all credit amounts in an account.
  • Balance: The difference between the debit and credit totals of an account.
  • Debit Balance: When the debit total is greater than the credit total.
  • Credit Balance: When the credit total is greater than the debit total.
  • Zero Balance: When the debit total equals the credit total (balanced).