5 Generally Accepted Accounting Priciples

----------------------------------------The Couting Concern Principle - A Business's assets are not for sale unless they
are liquidated (A company started in 1980 and will operate indefinitely)
The Business Entity Principle - Accouting only records the activities of the bus
iness (Koji does not accept a receipt for vacation expenses)
The Stable Dollar Priciple - Accounting ignores the fluctuations of the dollar (
Although the dollar fell, assets are recorded at original cost)
The Objectivity Principle - Acounting is based on tangible evidences (Koji match
es the invoice for equipment to transaction)
The Cost Principle - Accouting records the purchase price of Antique (The land i
s recorded at cost despite its higher value)
Journals
--------Different journals are used for different types of transactions like sales journ
al, purchase journal, cash recipt journal, etc.
Ledger
------Data from Journals are consolidated & summarized and sent to Ledger where each l
edger is each type of account.
The Chart of Accounts:
---------------------The Chart of Accounts is a list of all the accounts that are debited and credite
d when financial transactions are posted.
Each account has a name and an account type. Each account may also be assigned a
unique number, but that is optional.
The Chart of Accounts is often referred to as the General Ledger accounts
The chart of accounts is a listing of all accounts used in the general ledger, u
sually sorted in order by account number. The accounts are usually numeric, but
can also be alphabetic or alphanumeric. The account numbering system is used by
the accounting software to aggregate information into an entity's financial stat
ements.
Accounts are usually listed in order of their appearance in the financial statem
ents, starting with the balance sheet and continuing with the income statement.
Thus, the chart of accounts begins with cash, proceeds through liabilities and s
hareholders' equity, and then continues with accounts for revenues and then expe
nses. Many organizations structure their chart of accounts so that expense infor
mation is separately compiled by department; thus, the sales department, enginee
ring department, and accounting department all have the same set of expense acco
unts.
Typical accounts found in the chart of accounts are:
Assets:
-------Cash
Marketable Securities
Accounts Receivable
Prepaid Expenses
Inventory

Fixed Assets
Accumulated Depreciation (contra account)
Other Assets
Liabilities:
------------Accounts Payable
Accrued Liabilities
Taxes Payable
Wages Payable
Notes Payable
Stockholders' Equity:
---------------------Common Stock
Retained Earnings
Revenue:
--------Revenue
Sales returns and allowances (contra account)
Expenses:
---------Cost of Goods Sold
Advertising Expense
Bank Fees
Depreciation Expense
Payroll Tax Expense
Rent Expense
Supplies Expense
Utilities Expense
Wages Expense
Other Expenses
There are a number of ways to structure the chart of accounts. Click here for an
example of three-digit codes, here for an example of five-digit codes, and here
for an example of seven-digit codes.
Debit side accounts - AED - Assets, Expenses, Drawings
Credit Side Accounts - LRO - Liabilities, Revenue, Owner's equity
Simple rules to remember:
------------------------Debit all expenses and losses, credit all incomes and gains
Debit all assets, credit all liabilities
Debit the receiver, credit the giver
When you increase assets or expenses then you are debitting those accounts.
When you increase liability, Owner's equity, revenue then you are are crediting
those accounts.
Accounting Methodology: Double-Entry Bookkeeping:
------------------------------------------------Remember that the books must always be kept in balance so that every debit entry
must be accompanied by a corresponding credit entry, and vice versa.
This is the standard double-entry bookkeeping system.At the end of the year, the
bookkeeper calculated account totals, ran a Trial Balance to ensure the sum of

the debits equaled the sum of the credits, prepared necessary reports, and filed
the tax return.
Accounting Data: General Ledger:
--------------------------------The General Ledger consists of the Chart of Accounts, individual transactions, a
ccount balances, and the financial reports for a given accounting period. In oth
er words, the General Ledger is the repository for all financial records and sta
tements for a business for a particular time period.
When an Accounting period was over, the accountant prepared the General Ledger r
eports. The two most important reports, the Balance Sheet and Income Statement (
Profit and Loss Report)
Balance Sheet:
-------------The Balance Sheet provides a financial picture of the company at a particular po
int in time by reporting its assets, liabilities, and owner's equity.
Income Statement (Profit and Loss Report):
-----------------------------------------The Income Statement, or Profit & Loss Report, lists all income and expense acco
unt balances and calculates Net Income.
Accounting Account Types: Assets, Liabilities, Equity, Revenue, and Expenses:
----------------------------------------------------------------------------Lastly, each account in the Chart of Accounts is classified as one of five accou
nt types.
Assets:
what the company owns of value (e.g. cash, Account receivables,Equipments, Offic
e Supplies, Prepaid Expenses)
Liabilities:
what the company owes to others (e.g. Account Payables, Unearned Fees (Money rec
eieved in advance), Notes Payables (Money that a business promise to pay at a fu
ture date))
Equity:
that portion of the total assets that the owners or stockholders fully own (e.g.
Capital (money that the owner invests into the business), Withdrawls (money tha
t the owner takes from the business for personal use), (Also, Expenses, Revenue)
Revenue or Income:
money the company earns from sales, and interest and dividends on marketable sec
urities
Expenses:
money the company spends to produce goods or services (e.g. utilities, office su
pplies)
Credit & Debits:
---------------From a math perspective, think of a debit as adding to an account, while a credi

t is subtracting from an account.

Accounts that normally maintain a positive balance are called positive accounts
or Debit accounts, and they normally receive debits. For eg Cash Account.
Assets
Expenses are debit or positive accounts
Accounts that normally maintain a negative balance are called negative accounts
or Credit accounts, and they normally receive credits. For eg Loan Account.
Liabilities
Owners Equity
Revenue
Debit and Credit Accounts Logic:
-------------------------------There is logic behind which accounts maintain a
negative balance.
#It makes sense that Liability accounts maintain negative balances because they
track debt,
but what about Equity and Revenue? Well, though we are happy if our Revenue and
Equity accounts have healthy balances,
#from the company s viewpoint, the money in these accounts is money that the compa
ny owes to its owners.
What about debit accounts? It s easy to understand why an
#Asset account is positive since it tracks the company s Cash and other valuable p
ossessions,
but what about Expenses? Well,
#the services and supplies required to run the business do cause a decrease in O
wner s Equity, so they could be viewed positively from the company s standpoint.
Accounting Methods:
------------------#Accrual basis accounting counts the revenue as soon as an invoice is entered in
to the accounting system.
#Cash basis accounting does not count the revenue until the invoice is paid.
Profit:
------Net income is revenue less expenses. Other names for net income are profit, net
profit, and the "bottom line."
The Income Statement / P & L report:
-----------------------------------The P & L lists only the income and expense accounts, and their balances.
The income statement then calculates the difference to arrive at Net Income Befo
re Taxes.
A company can run a standard or detailed Profit and Loss Report any time during
the fiscal year to determine its profitability.

Net income before taxes is also referred to as earnings or profit.

Revenue and expense accounts are yearly or temporary accounts. At the end of eac
h fiscal year, the accounts must be "zeroed out" ... their balances reset to zer
o. Then their sum - net income - is applied to Retained Earnings (Owner's Equity
).
Most Accounting programs perform these tasks automatically.
The Balance Sheet:
-----------------The Balance Sheet is a financial snapshot of the business on any given date.
It is called the Balance Sheet because it reports on Assets, Liabilities, and Eq
uity, and the total account balances in these categories must balance according
to the following formula:
Assets = Liabilities + Owner's Equity
The formula can be read as follows:The total assets of a company equal the portion of the assets that the creditors
own (Liabilities), plus the portion of the assets that the owners or stockholde
rs fully own (Equity).
The balance sheet equation can also be written as Equity = Assets - Liabilities,
and is often better understood by beginners in this form.
Items:
-----For most users, QuickBooks "Items" can be defined as "categories" or "types" of
products and services sold.
Items are required and are used when creating invoices, sales receipt, refunds,
and credit memos. Sub-items may also be created.
Each item is linked to an account - usually a revenue account. Multiple items ma
y be associated with the same account. In fact, some businesses may have hundred
s of items per each revenue account.
If a business collects sales tax, separate items must be created for each city a
nd state in which the company sells products.
Business owners can track the performance of items and subitems via the QuickBoo
ks' "Sales by Item Summary" and "Sales by Item Detail" reports.