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Basic accounting concepts


Financial accountants produce financial statements based on Generally Accepted Accounting Principles of a respective country. In particular cases financial
statements must be prepared according to the International Financial Reporting Standards.

Financial accounting serves following purposes:

• producing general purpose financial statements


• provision of information used by management of a business entity for decision making, planning and performance evaluation
• for meeting regulatory requirements

Graphic definition
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.

The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in
the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for
these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities,
and shareholders or owners’ equity of the company on the date the accounts were prepared to...

Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them), remember the word AWED which
represents the first letter of each type of account.

Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).

*See page 2 for details….


Page 2 of 2

0 = Dr Assets Cr Owners' Equity Cr Liabilities


. _____________________________/\____________________________ .
. / Cr Retained Earnings (profit) Cr Common Stock \ .
. _________________/\_______________________________ Cr Revenue .
.
\________________________/ \______________________________________________________/
increased by debits increased by credits

Crediting a credit
Thus -------------------------> account increases its absolute value (balance)
Debiting a debit

Debiting a credit
Thus -------------------------> account decreases its absolute value (balance)
Crediting a debit

When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive
numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.

Related qualification
• There are several related professional qualifications in the field of financial accountancy including:
o Qualified Accountant qualifications (Chartered Certified Accountant (ACCA), Chartered Accountant (CA) and Certified Public
Accountant (CPA))
o CCA Chartered Cost Accountant (cost control) designation offered by the American Academy of Financial Management