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Payable - money owed to creditors, vendors, etc. Accounts Receivable - money owed to a business, i.e. credit sales Accrual Accounting - a method in which income is recorded when it is earned and expenses are recorded when they are incurred, all independent of cash flow Accruals - a list of expenses that have been incurred and expensed, but not paid or a list of sales that have been completed, but not yet billed Amortization – gradual reduction of amounts in an account over time, either assets or liabilities Asset - property with a cash value that is owned by a business or individual Audit Trail – a record of every transaction, when it was done, by whom and where, used by auditors when validating the financial statement Auditors – third party accountants who review an entity’s financial statements for accuracy and provide a statement to that effect Balance Sheet - summary of a company's financial status, including assets, liabilities, and equity Bookkeeping - recording financial information Budgeting – the process of assigning forecasted income and expenses to accounts, which amounts will be compared to actual income and expense for analysis of variances Capital Stock – found in the equity portion of the balance sheet describing the number of shares sold to shareholders at a predetermined value per share, also called “common stock” or “preferred stock”
and net profit by entity Depreciation . to be amortized over a period of time. defining. and negative value for liabilities and equity. the development cost of a new product Chart of Accounts .a summary of cash received and disbursed showing the beginning and ending amounts Closing the Books/Year End Closing – the process of reversing the income and expense for a fiscal or calendar year and netting the amount into “retained earnings” Cost Accounting . Debit .e. not expensed as incurred. i.an account entry with a positive value for assets.a type of accounting that focuses on recording.an account entry with a negative value for assets. Departmental Accounting – separating operating divisions into their own sub entities on the income statement.Capital Surplus – found in the equity portion of the balance sheet accounting for the amount shareholders paid that is greater or lesser than the “capital stock” amount Capitalized Expense – expenses that are accumulated. expenses.a method in which income and expenses are recorded when they are paid. showing individual income. Cash Flow . and reporting costs associated with specific operating functions Credit .a listing of a company's accounts and their corresponding numbers Cash-Basis Accounting .recognizing the decrease in the value of an asset due to age and use Dividends – amounts paid to shareholders out of current or retained earnings . and positive value for liabilities and equity.
a record containing the balance sheet and the income statement Fixed Asset . “LIFO.” an average cost over a given period. General Ledger . land. first out.a record where transactions are recorded.system of tracking costs associated with a job or project (labor.money owed to the owner or owners of a company. “standard.” last in. “serialized. also known as "owner's equity" Financial Accounting . equipment.system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits) Equity . Job Costing . first out. computers.accounting focused on reporting an entity's activities to an external party.Double-Entry Bookkeeping . ie: shareholders Financial Statement . etc.” first in. payment.” a “deemed” amount related to but not tied to a specific purchase. building. etc) and comparing with forecasted costs Journal . “average. “FIFO. “last cost. also known as an "account" .e.” the cost based on the last purchase.a record of all financial transactions within an entity Goodwill – an intangible asset reflecting the value of an entity in excess of its tangible assets Income Statement .” based on a uniquely identifiable serial number or character of each inventory item Invoice – the original billing from the seller to the buyer.long-term tangible property.a summary of income and expenses Inventory – merchandise purchased for resale at a profit Inventory Valuation – the method to set the book value of unsold inventory: i. outlining what was purchased and the terms of sale. etc.
ie: sale of an old building Note . rents. i.a list of employees and their wages Posting – the process of entering then permanently saving or “archiving” accounting data Profit .e.money owed to creditors. etc Liquid Asset . i.income generated from regular business operations Other Income . sometimes used in place of "loan" Operating Income . the accounts payable journal to the general ledger. Payroll .money borrowed from a lender and usually repaid with interest Master Account – an account on the general ledger that subtotals the “subsidiary accounts” assigned to it. Retained Earnings – the amount of net profit retained and not paid out to shareholders over the life of the business . interest. i.e. depreciation and amortization Non-operating Income .e.see "income statement" Reconciliation – the process of matching one set of data to another. vendors.money remaining after all expenses and taxes have been paid Non Cash Expense .cash or other property that can be easily converted to cash Loan . etc.income generated from non-recurring transactions. the bank statement to the check register.e.income generated from other than regular business operations.a written agreement to repay borrowed money. Cash might be the master account for a list of depository accounts at banks Net Income . etc.recognizing the decrease in the value of an asset.see "net income" Profit/Loss Statement . i.Liability .
Real Accounts . Credit what goes out. “Cash-ABC Bank” might be one of several subsidiary accounts that are subtotaled under “Cash” Supplies – assets purchased to be consumed by the entity Treasury Stock – shares purchased by the entity from shareholders. By looking into the nature of an element. etc.system of accounting in which transactions are entered into one account Statement of Account . . lender.the capital and retained earnings in an entity attributed to the shareholders Single-Entry Bookkeeping . So we will see how debits and credits act on these accounts.Debit what comes in.total income before expenses. Personal and Nominal Accounts. The accounts are widely classified into three categories they are Real.e. the account receivable from the bankrupt customer Golden Rules Of Accounting Golden Rules of Accounting: A good accounting system is to find the information about a transaction in a single entry. reducing shareholder equity Write-down/Write-off – an accounting entry that reduces the value of an asset due to an impairment of that asset. the elements affected by the transaction we decide on what to debit and what to credit.Revenue .e. Subsidiary Accounts – the subaccounts that are totaled on the financial statement under “master accounts.” i. Any account that is affected by transaction has to either debited or credited.a summary of amounts owed to a vendor. To do this we have a set of rules used to apply the debit and credit. Shareholder Equity . i.
Credit all incomes and gains. The accounting rule that is used for this type of accounts is "debit the benefit receiver" and "credit the benefit giver". The balance of these accounts becomes assets or losses at the end of year and moved to permanent accounts. and liabilities whose balances are carried to next operational cycle are real accounts.Debit all expenses and losses. revenues. The accounting rule that is used for this type of accounts is "Debit all expenses and losses" and "credit all incomes and gains". Real Accounts: The real accounts related to accounts that are intangible like assets. While paying the salary to the employees in cash. gains. Nominal Accounts: The Nominal accounts are temporary accounts which are closed at the end of each year by moving their balances to Permanent accounts. capital. If a product is bought on credit from a company "Y".Nominal Accounts . losses. If a discount is got from a company then it is credited to the discounts account. so credit the amount to product account(real account). then the amount is credited to company "Y" account (personal account) and debited from the product account (Real Account). Accounts that come under this type are expenses. Then according to the rule the amount is debited from the person "X" accounts (personal account) and credit to the cash account. debit the amount from the building account (real account) and credit it to the person account (personal account). If some cash was paid to a person X.Debit the receiver. the amount is debited from the salary account (nominal account). reserves. . The accounting rule that is used for this type of accounts are "debit what comes in" and "credit what goes out". debit it from the persons account(personal account). Say. Personal Accounts . Credit the giver. Other scenario would be to sell a product on credit to a person. Personal Accounts: The Personal accounts are accounts that are related to a person or an organization. if a building is bought from a person.
credit accounts for a given ledger for a month. But the preparation of trial balance also helps to easily consolidate the final account statements. Trial balance Trial balance is a list of balances of all the ledger accounts within a ledger. expenses will be recorded under the debit balances. If the total of the debit column does not equal the total of the credit column then there is an error in the ledger accounts. equity and revenue will be recorded under the credit balances. There might be some omissions in the ledger accounts. Trial balancing can easily trace the wrong posting of amounts in a different account. Trial balance is created in two columns one with all the debit balances and the other with all the credit balances. So trial balancing is also time consuming. but this . Purpose of Trial Balance: The main purpose of creating a trial balance is to check the correctness of all transactions recorded in accounts. This only done after all the transactions are recorded in the ledger. Liabilities. Some times there will be ledger entries that are wrong when looked into individually. Usually the trial balance is prepared every month. How is Trial Balance prepared? Trial balance lists the debit. Limitations But there is no guarantee that if the trial balance is fine. the ledger accounts are correct. But while doing a trial balancing there might have be other wrong entries that have compensated these errors.So these are the "debit and credit" golden rules applied for accounting. The assets. or even a duplicate entry is also a possibility.
In a case of payments received before the goods are delivered also requires an adjustment entry. Two Scenarios for adjustment entry: Accruals: In this scenario the income or expenses accrued but not recorded in the accounts. it can be done at the right time to avoid income and expense confusion . if the payment for a machinery that is acquired in this month is paid the next month. These types of entries are made in accrual based accounting based on the revenue recognition principle. an adjustment entry is made in this months account about the expenses next month. For example. a deferred entry must be made for every month by dividing the total amount by 12. Importance of adjustment entries: So at the end of financial year the neat and clean balance sheet has to be presented to the stock holders. Deferrals: In this scenario the income or expense is recorded but need to be deferred at a later time. if the EMI payment is made for year in the month of January itself. For example. but also to calculate the profit and loss precisely adjustment entries are must. Not only to know the cash flow for the financial period. First the cash received is recorded then a deferral adjustment entry is made on the day the goods are invoiced. Even though adjustment entries are known as balance day entries. Adjusting entries are made for income or expenses occurred in a previous time period at the time of preparing the financial statements or on the balance day.will ensure that the debit and credit balances are corrected every month Introduction to Adjustment Entries In accounting adjustment entries are made in the journal at the end of the accounting period.
So. pension funs. Assets are the resource acquired by the company that can be expressed in terms of cash. In case of banks. Usually balance sheet is based on three criteria's. intangible assets. These include investments in bonds. land that is not used by the company. Current Assets: Current assets are the one that is expected to convert to cash within the current operating time period of the company. These include cash. First one is the assets. receivables etc. property plant and equipment. Asset Classifications Classification of Assets: In a balance sheet the assets are classified as current assets. temporary investments. even some insurance are also considered as investments. and accounts receivable. inventory.Classification of Assets on Balance Sheet Balance sheet is a statement of accounting that gives the financial position of the company at the end of a specific time period. Property. stocks. Mostly assets are considered to pay the debts in case of any financial crisis in a company. investments. The balance sheet also helps to know the financial position of the company at the given instance. and others. they give more credit or allocate loans based on the assets acquired by a company. plant and Equipment: . then the liabilities finally the equity owned by stock holder or the owner of the company. shareholders also look at assets with much importance while investing in stocks. Investments: Long term investments that are not going to be sold in near future are considered as an investment.
Fixed assets are purchased with aim of using it on a long term to increase the profit of a company. Liability Classifications Current Liabilities: The liabilities that can be settled within a normal operation cycle of a business are known as the current liabilities. patents. machines. land that is used by the company. they are very important to the very existence of a business. property taxes.This type of assets are also known as Fixed assets. These include copyrights. trademarks etc. The assets that cannot be classified in any of the above category can be added to the balance sheet under "other assets". But. brand name. Since all the current liabilities will be because of the purchase of a product or service that is recorded under accounts payable. There are two types of liabilities. Depreciation is also calculated for these assets that are negated from the profit of the company. Classification of Liabilities on Balance Sheet A liability is an obligation for a company or an individual to settle a debt. Even the income tax. These include the fixtures. Most of the current liabilities should be settled within a year's time using the current assets. salaries. The liabilities that are due to acquiring machinery. property for the business operations are also considered as current liabilities. and automobiles. avoiding which could lead to legal action. Intangible assets: Intangible assets are those whose value cannot be calculated physically. telephone bills are also . buildings. Current and long term liability that are organized in a balance sheet. tools.
A long term liability that will be paid within an operational cycle is also termed as a current liability. Even some companies have extra columns to record the account balance after every transaction. notes. . Some of the basic accounts contained would be Assets. It is used to keep the track of accounts on a permanent basis. Long term liability includes loans. Gains. where the double entry bookkeeping is followed in common. Here the amounts are posted as credits and debits on these pages. bonds. General ledger General Ledger is the prime accounting document through which all the accounting activity takes place. The right balance between these two make a business more profitable. The transactions recorded in the sales daybook. Contents of General Ledger: Usually the general ledgers should include the date. If the liabilities are very less than the assets a company owns. Owner's equity. cash book and general journals daybook are put together in the general ledger. it is considered a profit making company. So the assets and liabilities form the major part of a balance sheet to know the liquidity of a business. Expense. It will have subsidiary ledgers to provide details about the accounts. Revenue. General ledger in its usual form will have the T-accounts type with the debit on the left and credit on the right side. Long-Term Liabilities: The liability that cannot be settled within a year of the balance sheet date is known a long term liability. Liability. and Losses. In a balance sheet these liabilities are shown on the right considered as capital assets.comes under this category. description and balance or total amount for each account. purchases daybook. mortgages that will exceed one year for payment.
Advantages of General Ledger: The balance sheet and the income statement are both got from the general ledger. This statement clearly indicates the profitability of the company. It serves as a reference to the accountants in preparing all other accounting statements. The revenue generated by selling long term assets or legal suits are Gains to the company. expenses incurred for secondary activity. Income statement is divided into two major sections they are Revenues and Profits. Sales . Income Statement Income statement otherwise known as profit and loss statement or earnings statement. Revenues & Profits: While calculating the revenues and profits they are classified based on the primary revenues. So nothing in account is without the general ledger. Chart of Accounts. The secondary revenues that are generated outside the prime activity like the interest of the cash. as account balances are noted after every transaction. Say for a manufacturer the revenue generated from manufacturing and selling is the primary revenue. Trial balance is also derived from the General Ledger. Revenues generated from the primary activity of the company are considered as primary revenues. It is easy to know the account balance. operating statement or statement of operations. secondary revenues. Expenses and Losses. is a company's financial statement that indicates how the revenue is converted into net income. Expenses & Losses: Expenses are also divided into two categories the expense incurred for primary activity. rent for building are taken as revenue from secondary activity.
Third party manufacturing cost would be a primary expense for a manufacturer. Otherwise the entry is said to be an "unbalanced journal". description. Advantages of Journal entry . The entries are made everyday for the transaction of that day. Income statement may have the cost that is not up to date as the transactions have to record then and there. non-recurring entry. there is some uncertainty regarding the income statement. economic slowdown or sudden rise in prices. But some of the common entries made are entry number. if the total of the debits and credits are equal then it is a "balanced journal". Here. accounting period. Even though the income statement has all the criteria to know the profitability of a company. date. Costs may have varied in an operational period due to so many reasons like.commission for a retailer would be a primary expense for a retailer. Estimates are better to get the approximate revenues to expenses of a company. To make it clear a column is named as debit the other as credit. recurring entry. Journal Entries A journal entry made in accounting is nothing but recording of transactions into accounting journal. Contents of a Journal Entry: The journal entry may vary in contents depending on the companies' requirement. But loosing a legal suit for a land or property would be included as a loss to the company in the income statement. batch number. The expense on secondary activity would be the interest on bank loans etc. How a journal entry should be? There will be numerous journal entries that can be either a debit or a credit entry. so it is also called as "Day Book".
Accounts Receivable Methods: There are two methods followed in bookkeeping for account receivables. if all the transaction is recorded in a single journal. The large firms usually follow the allowance method to know the credit losses immediately. But when the customer does not pay the credit owed to a company it is considered as Bad Debts. it will look weird. but the amount is credited to the sales account. So bad provision accounts are revised based on the criteria set by the companies. This account consists of all the possible bad debt accounts that a seller expects non payment of the credit. since . Only with a single entry the whole history about the transaction can be got. Say. But the customer is given the flexibility to pay the amount at a later point of time and this kind of transaction is recorded as Accounts receivables.In a journal entry the omission of transactions are limited. In direct write off method. Most companies have a separate journal for everyday transactions to make it more useful for the business Accounts Receivables . But in case of small business. In some companies a percentage is fixed for the total debtors of the company.Benefits and Methods Account receivables are the credit owed by a customer to a company or a business. Second advantage is that all entries are made with a related description to supplement the transactions. a single entry is used to debit the amount from the bad debt expense account and crediting the amount to account receivables. if an everyday transaction and a once in a way transaction has the entry in a single will make things difficult. Since all the debit and credit amounts are written side by side chances of recording wrong amounts is less. a bad provision account or liability account is created. one is the allowance method. other one is the direct write off method. since they are recorded in the chronological order. In the allowance method. the write off method is followed. Accounts receivables is a debit account. An invoice is generated for the product or a service purchased by a customer. So in a business.
But when the amount is not paid it is debited as bad expenses from the income statement. Loss of checks can be found out easily by checking the statement or even the amount can be added to the ledger. it cannot be found in the company ledger. receiving payments.the transactions are limited. For sure this is a tedious and a time consuming process to manually check each and every entry. Benefits: Accounts receivable has the advantage of projecting higher sales in the income statement. Apart from checking the amounts. Most important is the interest charges credited by the bank will be in the bank statement. Companies record the transaction like checks written. service charges paid in a general ledger of the company. So most companies check their ledger with the transactions recorded in the bank statement. Why to do Bank reconciliation: Most banks send statements to its clients on a monthly basis. but not in companies' ledger. Bank reconciliation | Bank Statement Bank reconciliation is a process of matching the accounting details with the bank statements. Account receivables are considered as current assets. even the timing at which the . In the balance sheet. This process ensures that none of the transaction is missed out in the banks statements and vice versa. are rectified while doing bank reconciliation. The balance sheet shows a lesser amount of credit being paid by the debtors. where credit losses can be shown at later time for tax purposes. Errors committed in cash received. Especially the bank service charges deduction may be only on the bank statement. The direct write off method benefits the small businesses. since payments are considered due within a year. So in the same checking account the bank will also record the transaction done by the company.
patents etc. The second types of asset accounts are Long term investments accounts that are for investment that will not be disposed in near future. Some common chart account followed in balance sheets are Assets. undue credit reduction from a bank. Following are some of the common asset accounts included in the chart of accounts. Most bookkeeping software's are designed to integrate with the online bank statements. Nowadays with online banking the banking reconciliation becomes simpler with advanced bookkeeping software. Owner's (Stockholders') Equity. Say if a check was deposited at the end of the month the transactions will be in the ledger. Bank reconciliation can avoid from check bounces. It varies from company to company. Liabilities. The fourth types of asset accounts are for the intangible assets. The choice of having different types of accounts in the chart of accounts depends on the company. All companies no matter big or small do bank reconciliation to set right the accounts on a monthly basis. The current assets are the assets that will be converted to cash within a year or in the current operating cycle of a company. Bank reconciliation has more advantages than disadvantages. Liabilities: . whose value cannot be calculated physically like the trade marks. but not in the current month's bank statement. Assets: Assets are the resources acquired by the company that can be expressed in terms of cash. as the organizational makeup is different for each company. bank reconciliation would be the best alternative.transaction was done is important. The third types of accounts are the fixed assets that are purchased with aim of using it on a long term to increase the profit of a company. Chart Of Accounts Chart of accounts is the list of accounts adopted or used by a company. Instead of breaking the head while preparing final statements.
Long term liability account is for liabilities that would take more than a year to settle. which is the stock purchased back by the company. retained earnings. . There are organized in three types they are paid-in capital. Paid in capital is contributed by investors by buying the stocks above the normal value. There are only two commonly account for liabilities. treasury stock. Current liability accounts are for accounts that can be settled with the current operational cycle. Retained gain is the net income or profit that is not given to the share holders but is invested in the same business. Owner's (Stockholders') Equity: Owner or stockholders equity is calculation by negating liabilities from assets. The last type of accounts is Treasury stock.A liability is an obligation for a company or an individual to settle a debt.