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What Is Accountancy

What is Accountancy

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20 views

What Is Accountancy

What is Accountancy

Uploaded by

jecielcabrera.fh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1. What is Accountancy?

Accountancy is the practice of recording, classifying, and summarizing financial


transactions to provide useful information for decision-making. It helps in
understanding the financial position and performance of a business.

Accountants prepare financial statements like:

 Balance Sheets
 Income Statements
 Cash Flow Statements

2. Key Principles of Accounting

There are several key principles that accountants follow to ensure consistency and
accuracy:

 The Double-Entry System: Every financial transaction has two sides: a debit and a credit.
 Accrual Basis: Revenues and expenses are recorded when they are earned or incurred, not
when cash is received or paid.
 Consistency: The same accounting methods should be used from period to period.
 Prudence (Conservatism): Anticipate no profits, but provide for all potential losses.

3. Basic Accounting Terms

Here are some essential terms to understand in accountancy:

 Assets: Resources owned by a business (e.g., cash, inventory, equipment).


 Liabilities: Obligations the business owes to others (e.g., loans, payables).
 Owner’s Equity: The owner’s claim on the business after liabilities are deducted from assets.
 Revenue: The income generated from normal business activities.
 Expenses: The costs incurred to generate revenue.
 Profit: The difference between revenue and expenses.

4. The Accounting Equation

The fundamental accounting equation is:

Assets=Liabilities+Owner’s Equity\text{Assets} = \text{Liabilities} + \text{Owner's


Equity}Assets=Liabilities+Owner’s Equity

This equation must always be in balance, which ensures that the double-entry
system works.
5. The Double-Entry System

In this system:

 Every transaction affects at least two accounts.


 One side of the transaction is a debit (left side), and the other side is a credit (right side).
 The total debits must always equal the total credits.

Example: If a company buys office equipment worth $1,000 on credit:

 Debit (increase in asset): Office Equipment $1,000


 Credit (increase in liability): Accounts Payable $1,000

6. The Accounting Cycle

The accounting cycle consists of a series of steps that accountants follow to prepare
financial statements. The basic steps are:

1. Transaction Analysis: Identify the accounts affected by a transaction.


2. Journal Entries: Record transactions in the journal.
3. Posting to the Ledger: Transfer journal entries to the ledger accounts.
4. Trial Balance: Verify that total debits equal total credits.
5. Adjusting Entries: Make necessary adjustments for accrued or deferred items.
6. Financial Statements: Prepare the income statement, balance sheet, and cash flow
statement.
7. Closing the Books: Close temporary accounts (revenues and expenses) to prepare for the
next accounting period.

7. Types of Financial Statements

 Income Statement: Shows the company’s profitability over a period by subtracting expenses
from revenues. Net Income=Revenue−Expenses\text{Net Income} = \text{Revenue} -
\text{Expenses}Net Income=Revenue−Expenses
 Balance Sheet: Displays the company’s financial position at a specific point in time.
 Cash Flow Statement: Provides information on the cash inflows and outflows from operating,
investing, and financing activities.

8. Examples of Financial Transactions

Here are some examples of accounting transactions:

1.

Sale of Goods (on Credit):


2.

o Debit: Accounts Receivable


o Credit: Sales Revenue

3.

Payment of Rent:

4.

o Debit: Rent Expense


o Credit: Cash

5.

Owner’s Investment:

6.

o Debit: Cash
o Credit: Owner's Equity

9. Important Accounting Concepts

 Revenue Recognition Principle: Recognize revenue when it is earned, not necessarily when it
is received.
 Matching Principle: Match expenses with the revenues they generate in the same period.
 Going Concern: Assumption that a business will continue to operate for the foreseeable
future.
 Materiality: Some financial information is too trivial to affect decisions, so it may be ignored.

10. Conclusion

Accountancy is the backbone of financial management for businesses. It ensures


accurate recording of financial transactions and provides stakeholders with the
information needed to make informed decisions.

In the next lesson, we will dive deeper into Journal Entries and Ledger Accounts, two
critical components of accounting.

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