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Accounting

Accounting is the recording of financial transactions along with storing, sorting, retrieving,
summarizing, and presenting the results in various reports and analyses.

Types of accounting

1) Financial accounting
a) It is a specialized branch of accounting that keeps track of a company's financial
transactions. Using standardized guidelines, the transactions are recorded, summarized,
and presented in a financial report or financial statement such as an income statement or a
balance sheet.
b) Used by internal and external users.
c) It is primarily concerned in processing historical data.
d) Financial accounting has common rules known as accounting standards and
as generally accepted accounting principles (GAAP).
e) Types of financial statements
i) Income statement
ii) Balance sheet
iii) Statement of stockholders’ equity
iv) Statement of cash flows
2) Cost accounting
a) Cost accounting assists management to plan and control the business through budgeting
for operations, capital budgeting for expanding operations, standard costing and the
reporting of variances, transfer pricing, etc.
b) Special analyses include cost behavior, cost-volume-profit relationships, make or buy
decisions, selling prices for products, activity-based costing, and more.
c) Cost accounting had its roots in manufacturing businesses. However, today it extends to
service businesses.
3) Managerial accounting
 a) Provides management with information which is not obtainable from the financial
accounts of a business. It is used to gather and analyze the information which is used as a
foundation for making future decisions affecting the performance and profitability of the
firm.

Basic accounting terms

1) Revenue: revenue is income earned by the company from its business activities. The revenue
account is a temporary equity account that increases total equity in the company. This means
that the revenue account has a credit balance. Revenues are recorded when income is earned
not necessarily when the cash is collected from the sale. This is consistent with the accrual
basis of accounting.
2) Expense: the cost incurred to generate revenue. Expenses accounts are equity accounts with
a debit balance. There are two types of expense accounts, one operating expense and other
non-operating expense.
3) Liabilities: they are defined as debts owed to other companies. Liability accounts have a
credit balance. There are two types of accounts; one non-current such as notes payable,
unearned revenue or long-term loans and other is current liability like account payable or
accrued expense.
4) Leasehold: Leasehold is a designation that is assigned to an asset being leased. Under a lease
arrangement, the lessee gains the use of an asset that is owned by the lessor for a certain
period of time, in exchange for a series of payments. The leasehold designation appears in
the accounting records of the lessee, and is most commonly seen as a fixed asset account
called "Leasehold Improvements". These improvements are capital expenditures applied to a
leased asset, such as building space. The lessee amortizes leasehold improvements over the
shorter of their useful life or the life of the lease.
5) Equity: Equity is defined as the owner’s interest in the company assets and often referred to
as net asset. It has credit balances
6) Drawings: withdrawal of cash by the company’s owner for his personal use. It is a contra
equity account because drawings reduce equity as well as assets at the same time. It is not an
expense.
7) Assets: the resources that are held by the company and have debit balances. There are four
types of assets.
a) Current assets: Resources that are expected to be consumed within the current period
b) Non-current assets: resources that expected to be used for more than a year.

c) Quick assets: Assets that are quickly convertible into money. Quick assets are equal to
current assets less stock or inventory. Quick assets are also referred to as liquid assets.

Quick Assets = Current Assets - Closing stock (inventory)

Types of quick assets: cash, marketable securities, account receivables, prepaid expense,
and short term investments.

d) Tangible: include any resources with a physical presence. Some examples include cash,
fixed assets, and equipment.
e) Intangible: the resources typically consist of intellectual property or that doesn’t have a
physical presence such as patents, trademarks, copyrights or goodwill*.
*Goodwill is a company’s value that exceeds its assets minus its liabilities. Though
consider as asset but it’s still not recorded in company’s balance sheet. So according
to the accounting standards goodwill can only be recorded when an entire company is
being purchased.

Depreciation
It is allocation of the cost of non-current assets over its useful economic life. Depreciation is
recorded as an expense in income statement.
There are 3 types of depreciation methods:
 Straight-line method where same amount is charged for each accounting period in the
𝑐𝑜𝑠𝑡−𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
asset’s useful year. It is calculated through a formula 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒

 Reducing balance method where the depreciation is charged at a fixed rate like
straight line method but the rate percent is calculated on the book value of asset. The
amount of annual depreciation gradually reduces. This method is especially suitable
to assets with long life, e.g., plant and machinery, furniture, motor car etc.
 Revaluation method where the assets are revalued each year. It is suitable for loose
tools or small tools.