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Friday, December 11, 2009

Basics of Accounting

Hi

This is the first time I am writing a blog. I am kind of excited and nervous. Thousands of ideas are overflowing and I need a needle to thread them all into one. I would not say that I am a master of my subject but I have a fair amount of understanding and want to share it and learn more from others.

I am going to start with Basics of Accounting and then gradually pick up Financial Accounting and Reporting "FAR" topics. I am keeping my fingers crossed hoping to expand my horizons through this medium. The idea is also to help CPA candidates with the FAR section of the exam.

We all know that Accounting is a business language which helps in creating the books of accounts (recording monetary transactions), financial statements (reporting the financial information) and analyzing that information to make sound economic decisions.

It has its own set of rules, principles and terminologies. You may use www.nysscpa.org/glossary source to refer to different accounting terminologies.

The basic accounting process starts with identifying the capital employed in the business, its business expenses, the income being generated and how the business is being or will be funded. Please refer to the source http://www.futureaccountant.com/accounting-process/ where accounting fundamentals have been beautifully explained.

However, I would still like to emphasize on the following three areas:-

1. Double Entry Accounting system,
2. Nature or type of account involved and
3. Rules of Debit and Credit.

The Double Entry Accounting system signifies that a business transaction effects any of the two elements i.e asset, liabiltity, income or expense.

The Debit/Credit rules which we must always remember:
For Real Account
a. Debit what Comes in and Credit what goes out.
For Personal Account
b. Debit the receiver and Credit the giver.
For Nominal Account
c. Debit all expenses and losses and Credit all incomes and gains.

At this point in time, I would also like to refer to some of the accounting concepts and conventions. These are referred to as Statement of Financial Accounting Concepts "SFAC". They lay down the objective and fundamentals used to develop the Generally Accepted Accounting Principles "GAAP".
Accounting Qualities is one of the most important Accounting Concept. It states that the financial information to be decision-useful has to be relevant and reliable.

The other important Accounting Concept is Recognition and Measurement in Financial Statements. A set of financial statement must comprise of :-
a.Balance Sheet showing the financial position at the end of period,
b.Income Statement depicting earnings for the period,
c.Comprehensive Income for the period,
d.Cash Flow Statement for the period and
e.Owner's equity statement showing capital transactions during the period.

By Recoginition it is meant how an element of the financial statement be presented and measured so that it is meaningful and useful for the users of the financial statement information.

There are different ways in which an element can be measured, these being, Historical Cost, Net Realizable Value, Fair Market Value, Replacement Cost or Present value of discounted future cash flows.

Also based on the rule of conservatism it is prudent to recognize all expenses and losses when benefits are consumed or an asset loses a future benefit and defer revenues and gain until they are realized or earned.

Now that I have briefly touched upon accounting basics, I would like to continue to work on various GAAP topics a little more in detail. Once again I want to reiterate the fact that this is my whole and sole attempt to put down my understanding of the topic in here. I welcome all suggestions and Comments.

Thanks for reading my blog and see you again:)

Take Care

Aprajita

3 comments:

  1. Very good job Aprajita. I am glad to see there are other people like me who interested in blogging about accounting education. I am going to post a link to you blog on my own blog. I look forward to possibly working with you in the foreseeable future. Until then I wish you much success with your blog

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  2. Oooh, the rules of debit and credit. These are actually confusing, especially for people who don't have any idea on both. People shouldn't always depend on automated programs! Although such programs are already proven to help, our brain still works better. It's just a matter of getting the tasks done by using both. ;)

    Jamie Shellman

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  3. How do you differentiate between Real, Personal and Nominal accounts? A brief explanation and examples will help. Tq.

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