BASIC ACCOUNTING NOTES
Here’s a simple guide to basic accounting principles and terms:
1. The Accounting Equation:
This is the foundation of all accounting:
Assets = Liabilities + Equity
Assets: refers to what the business owns (e.g., cash, inventory, equipment).
Liabilities: refers as to what the business owes (e.g., loans, unpaid bills).
Equity: refers to the owner’s claim on the business (owner’s capital or retained earnings).
2. Types of Accounts:
Accounts are categorized into five main types:
1. Assets – these are the resources owned by the company
Examples: Cash, Equipment, Inventory
2. Liabilities – these are the obligations of the company
Examples: Loans Payable, Accounts Payable
3. Equity – refers to the owner’s interest in the company
Examples: Common Stock, Retained Earnings
4. Revenue – Income from business activities
Examples: Sales, Service Revenue
5. Expenses – Costs incurred to generate revenue
Examples: Rent, Salaries, Utilities
3. The Double-Entry System:
For every financial transaction, two accounts are affected:
Debits and Credits must always balance.
Debits increase assets and expenses, decrease liabilities and equity.
Credits decrease assets and expenses, increase liabilities and equity.
4. Financial Statements:
Key financial reports generated by the accounting process:
Income Statement: Shows profitability (Revenue – Expenses = Net Income).
