Accounting Basics

In commercial enterprises accounting is involved in recording business transactions and then reporting the results in the form of financial statements.

To make the financial statements more understandable, there are some common rules known as generally accepted accounting principles (GAAP). In the USA the lead organization for researching and issuing the accounting rules is the Financial Accounting Standards Board (FASB).

All of the accounting rules are based on some underlying or basic accounting principles such as cost, matching, economic entity, going concern, revenue recognition, full disclosure, materiality, conservatism, and others. Accountants also strive for the financial reporting to be relevant and reliable.

The accounting system is known as double-entry, because every transaction will involve at least two accounts in a company's general ledger. The accounting system requires that at least one account be debited (amount entered on the left side) and one account be credited (amount entered on the right side).

The accrual basis of accounting provides a better picture of a company's financial results than the cash basis of accounting. Under the accrual basis of accounting, revenues and assets are reported when they are earned; expenses and liabilities are reported when they are incurred.

The output of the accounting system includes three main financial statements: balance sheet, income statement, and cash flow statement. The balance sheet reports the financial position of a company at a moment in time, such as April 30, 2007. The balance sheet reports a company's assets, liabilities, and stockholders' equity. The income statement reports the company's profitability during a period of time. The statement of cash flows reports the changes in cash during the same period of time. The notes to the financial statements are an integral part of the financial. statements.