Basic Accounting Concepts


Each example shows how different transactions affect the accounting equations. This represents the difference between finance, accounting and bookkeeping. Revenues are matched to services performed and product sold, and expenses are matched to activities that have incurred expenses. This is why accrual based reporting conforms to GAAP and cash based reporting does not.


Companies typically do not want to simply break even, as they are in business to make a profit. Break-even analysis also can help companies determine the level of sales that is needed to make a desired profit. The process for factoring a desired level of profit into a break-even analysis is to add the desired level of profit to the fixed costs and then calculate a new break-even point. We know that Hicks Manufacturing breaks even at 225 Blue Jay birdbaths, but what if they have a target profit for the month of July?

Preparing Your Balance Sheet

This long-term and current liabilities in accounting with a difference of about 12 months among them. Liabilities in accounting refer to obligations that usually end up in the balance sheet of a company. Examples of liabilities in accounting include accounts, wages, interest, income taxes, bonds and loans payables.

What are the 11 basic accounting formulas?

  • Accounting equation formula. Liability + Owner's Equity = Assets.
  • Break-even point formula.
  • Cash ratio formula.
  • Cost of goods sold formula.
  • Debt-to-equity ratio formula.
  • Gross profit and gross profit margin formulas.
  • Inventory shrinkage formula.
  • Markup percentage formula.

It is because the going concern concept provides the firm with the basis to show its assets’ value in the balance sheet. These are the basic ideas or assumptions under the theory base of accounting that provide certain working rules for the accounting activities of an organization.

Two Journal Transactions for Writing Off Debt and Two for Charging Depreciation Expense.

See articles Journal and Ledger for more on account entry and account posting in the accounting system. Account refers to a formal business relationship between two parties, usually a seller and a customer. When one is an account of the other, each party has particular rights, privileges, and obligations. Start the analysis from the Financial Statements and Statutory Reporting and finish in the first posting (better if accountants are not “corporates or directors”). Please help me understand why presence of large number of reconciliation accounts should be discouraged? How presence of large number of reconciliation accounts could be counter productive? To my mind reconciliation accounts actually help in reducing the line items in COA.

What is the main purpose of accounting equation?

The accounting equation represents the relationship between the assets, liabilities and capital of a business and it is fundamental to the application of double entry bookkeeping where every transaction has a dual effect on the financial statements.

Additionally, the nature of the account structure makes it easier to trace back through entries to find out where an error originated. Double-entry accounting also serves as the most efficient way for a company to monitor its financial growth, especially as the scale of business grows. Peggy James is an expert in accounting, corporate finance, and personal finance. She is a certified public accountant who owns her own accounting firm, where she serves small businesses, nonprofits, solopreneurs, freelancers, and individuals.

Limits of the Accounting Equation

On January 1, 2020, the had $100,000 assets in terms of cash, $0 liabilities, and $100,000 owner’s equity. Here are the different ways the basic accounting equation is used in real-life situations. The following examples also show the double entry practice that maintains the balance of the equation. Assets will always equal the sum of liabilities and owner’s equity. Every transaction demonstrates the relationship of the elements and shows how balance is maintained. Many small business owners prefer the cash basis due to its simplicity and ease of understanding. At the end of any given period, the recorded net income will agree more closely to the change in the business’s cash balance.

  • For twenty years, the proven standard in business, government, education, health care, non-profits.
  • Business information incluldes both financial and nonfinancial information.
  • As you can imagine, the concept of the break-even point applies to every business endeavor—manufacturing, retail, and service.
  • It is helpful for the facilities manager to understand these terms as they are used by business officers and accountants.
  • Owner’s equity is the amount of money that a company owner has personally invested in the company.
  • Otherwise, they will not be able to replace worn-out assets or grow to meet increasing demand for their programs.

An individual account is an electronic or paper record stating a financial balance for a specific item, class of items, or purpose. No longer required accounts still used – missed opportunity to streamline transaction capture, close and reporting. A new table; ACDOCA, and set of journal transactions allow GL entries to be made as a single source of info, including e.g. cost centers, internal orders, WBS elements, CO-PA characteristics and other info. T-accounts make it much easier to understand debits and credits at a glance. A cost element is created based on identifying a GL account being relevant for profit / loss. GL accounts are then activated per company code and additional settings are added to control postings within that company code.

The chart of accounts: concept & SAP design (R/3 to S/4HANA)

To summarize, you should memorize what accounts you debit and credit to increase and decrease. There are very few absolutes in the world but this is one of them.

In agriculture, non- assets and liabilities may be further divided into intermediate and long-term . The purpose of comparing intermediate or long-term liabilities to intermediate or long-term assets is to determine whether the debt is structured consistently with asset life and to evaluate the overall balance sheet structure.