14.3 Basic Accounting Procedures

Accounting is the language of business, helping companies track their financial health. It involves recording transactions, analyzing data, and creating reports that show how a business is doing money-wise.

The accounting cycle, bookkeeping vs. accounting, and the accounting equation are key concepts. These tools help businesses keep tabs on their cash, debts, and overall financial picture, which is crucial for making smart decisions.

Accounting Fundamentals

Accounting Cycle

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• Process of recording, analyzing, and reporting financial transactions over an accounting period (month, quarter, year)
• Six steps of the accounting cycle:
  1. Analyze and record transactions in a journal (journalizing)
  2. Post transactions from journal to ledger, organizing by account
  3. Prepare unadjusted trial balance listing all account balances, ensuring total debits equal total credits
  4. Prepare adjusting entries for accruals, deferrals, and other adjustments at period end
  5. Prepare adjusted trial balance incorporating adjusting entries, ensuring accounts remain balanced
  6. Prepare financial statements (income statement, balance sheet, cash flow statement) reporting company's financial performance and position

Accounting vs Bookkeeping

• Bookkeeping: Component of accounting focusing on recording financial transactions
  • Maintains accurate records of company's financial activities
  • Tasks include recording transactions, posting to ledgers, preparing trial balances
• Accounting: Encompasses bookkeeping and additional functions
  • Analyzes, interprets, and communicates financial information
  • Tasks include preparing financial statements, analyzing financial data, providing insights for decision-making
  • Requires higher level of expertise and knowledge of accounting principles and standards

Accounting Equation

• Represents relationship between company's assets, liabilities, and owners' equity
  • Formula: $Assets = Liabilities + Owners' Equity$
• Assets: Resources owned by company with economic value (cash, inventory, equipment, accounts receivable)
• Liabilities: Company's financial obligations or debts (accounts payable, loans, taxes owed)
• Owners' equity: Owners' residual claim on company's assets after deducting liabilities
  • Consists of contributed capital (investments by owners) and retained earnings (accumulated profits)
• Accounting equation must always be in balance, changes in one component offset by changes in another to maintain balance