Accounting Fundamentals

Accounting Fundamentals

Dr. Hercules Bantas

A Reluctant Geek Academic Guide

Published by The Reluctant Geek

Melbourne, Australia

Copyright Hercules Bantas 2012

Financial Statements and the Accounting Equation

The General Journal and the Ledger

Adjustments and Closing the Books

Inventories and Retail Operations

Accounting Information Systems

Financial Statements and the Accounting Equation

One of accounting's key tasks is financial reporting. Information on the economic performance of an entity must understood by interested parties, both internal and external to the entity, so they can judge an entities performance and compare it with other like entities. The financial statements rely on the logic of the accounting equation, which describes the relationship between assets, liabilities and owner's equity. The accounting equation also provides the logic for accounting recording procedures, but these procedures are outside the scope of this guide. Key elements in the communication function of accounting are the Generally Accepted Accounting Principles within a nation state. In essence, these conventions provide a common 'language' for accounting within a society that encourages consistency in reporting economic information. This study guide will begin by looking at the functions of accounting, before moving on to discuss the accounting equation, accounting conventions, and financial statements.

What is Accounting?

Accounting is a system of financial reporting that identifies, records, and communicates the economic events of an entity (Weygandt, et al. 2010, p. 4). What does this mean?

Identify: An accountant needs to be able to identify if an event is relevant to the accounting requirements of an entity, and whether or not it can be recorded. Some events are easily identifiable, such as sales or services rendered to a customer. Others, such as the depreciation of assets, are not as obvious and must be calculated using pre-determined criteria.

Record: Accounting provides a universal and structured framework for recording identified economic events. Uniform reporting across all entities allows for a more accurate estimate of an entity's financial position, as well as meaningful comparisons between entities.

Communicate: The most important aspect of accounting, communicating financial information is what differentiates accounting from bookkeeping. Accounting provides a raft of tools, in the form of reports, with which interested parties can analyse the effect that economic events have had on an entity.

The process of communicating data about the economic performance of an entity allows an accountant to inform those who need to know. Stakeholders- including shareholders, board members, and employees- depend upon information communicated by accounting systems to understand economic performance of an entity, its present-day status, and the course upon which it should be set for the future.

Accounting requirements of internal and external users differ, and thus accounting can be divided into Managerial Accounting, which provides reports for internal users such as Managers and employees, and Financial Accounting, which provides reports for external users such as shareholders.

Compromising Influences

Reporting on the economic performance of an entity assumes that all information gathered is accurate and uncompromised. Unfortunately, this is not always the case in real world situations, and information