Accounting Principles 1) Accounting methods - Cash based or Accrual based (diff and applications)

Accounting's Key Activities

Purpose: Use this job aid to review the key activities that form the core of accounting.

At its root, accounting consists of three activities identifying, recording, and reporting accounting information. The accounting data produced is used to prepare financial statements that communicate an organization's financial position. Knowledge of these activities will help you understand and analyze the information presented in the financial statements.

Accounting's Key Activities

Identify transactions Record transactions For an economic activity to be considered a transaction it must be possible to express it in monetary terms. There are two systems in practice to record transactions: single entry and double entry bookkeeping. Most businesses use double entry bookkeeping because it provides a more complete and accurate picture of the financial position of a company. The double entry bookkeeping system represents the two-fold effect of each transaction. When a transaction takes place it impacts at least two different accounts, one as a debit and the other as a credit. Therefore each transaction is recorded twice in this system. Before transactions can be recorded:

they're analyzed and classified to determine which accounts are affected, and it's determined how the accounts are affected (for example, which account will be credited and which will be debited)

Journals and ledgers are used to record transactions. Transactions are recorded in the journal first, or journalized, and then posted to the relevant accounts in the ledger. Accounts have a debit side represented in the left column and a credit side represented in the right column. For this reason they are sometimes referred to as T-accounts. Every transaction affects two accounts, one as a debit and the other as a credit. Some transactions may affect more than two accounts, but their total credit and debit totals always match. Trial balances must be achieved before financial statements can be prepared. Report transactions Financial statements are prepared based on the accounting data. The three most often prepared financial statements are:

Balance Sheet Communicates the business's financial position at a certain point in time, including assets, liabilities, and equity at the end of the financial period Income Statement Reports profit or losses as the difference between revenues and expenses during a specified accounting period Cash Flow Statement Provides historical information on the cash flow in and out of a business during a specified accounting period

These statements are shared with internal and external stakeholders, who use the information to make business decisions.

Assumptions, Conventions, and Principles

Purpose: Use this job aid to review the assumptions, conventions, and principles that make up basic accounting practices and help establish accounting as a common business language. Accounting provides a common ground and language through the use of certain assumptions, conventions, and principles. Together they allow accountants to prepare comparable financial statements regardless of industry, country, or language.

Assumptions, Conventions, and Principles

Assumptions Separate Entity Dictates that the finances of the business are completely independent of the personal finances of any of the owners or stakeholders. Going Concern The premise that a company will continue to operate, meaning that the company's assets will continue to be used in the foreseeable future. Fixed Time Period Sets the expectation that financial statements will be prepared for a specific time period with a defined beginning and end. Conventions Money Measurement Business activities must be able to be expressed in monetary terms to be recorded as transactions. Conservatism The practice of reporting less revenue and a lower asset amount (or higher liability amount) in a situation that involves uncertainty between two reasonable alternatives of reporting in accounting books. Cost The practice used by accountants to deal with the depreciation of a company's assets. Principles Matching principle Dictates that expenses be matched with revenues in the period being reported. This is done to prevent the overstatement of income in a period.