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Concepts in Accounting (Author: gordonb)
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Most Important Concepts of Accounting
DEBITS MUST ALWAYS EQUAL CREDITS
Debit (DR)=Left Side
Credit (CR)=Right Side
(There is an R in Credit, But not in Debit)
Indent the Credit account
(Debits generally come first)
Concepts to Remember
- In accounting, for every action there is an equal and opposite reaction
- EG debit one account, therefore we must credit the other relevant account
- If we don't the accounts will not balance
Why do we have accounting?
- Accounting is useful as it provides a way to evaluate the financial performance of an entity.
- For example, shareholders
- It can also be used by government authorities to calculate tax payable
- There are many other relevant examples of why accounting information is useful
:: Types of Accounts ::
A Useful Memory Technique
- Debit Accounts (DR)
- Where the money is going
- Expenses, Assets
- Credit Accounts (CR)
- Where the money comes from
- Revenue, Liabilities, Owner's Equity
Example Transaction
- J smith purchased a car for $800 in cash,
- So what are we spending it on-The car
- Where are we getting it from-The Cash at bank
| Car |
800 |
|
DR (Asset Account) |
| Cash at bank |
|
800 |
CR (Asset Account) |
- Notice how the account is balanced ($800 on credit side and $800 on debit side)
What are the types of Accounts
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Where does it belong |
Type |
| Revenue |
Income Statement |
CR |
| Expenses |
Income Statement |
DR |
| Assets |
Balance Sheet |
DR |
| Liabilities |
Balance Sheet |
CR |
| Owner's Equity |
Balance Sheet |
CR |
* Type is usually but not always
:: Types of Statments ::
Income Statement
- This is where revenues and Expense are recognised
- Examples of Revenue- Sales, Interest Revenue (GENERALLY ON CREDIT SIDE)
- Examples of Expenses- Advertising, Telephone expenses
- (GENERALLY ON DEBIT SIDE)
Balance Sheet
- Where assets liabilities and owner's equity are recognised.
- Examples of Assets- Buildings, cars (GENERALLY GO ON DEBIT SIDE)
- Examples of Liabilities- Loans, Accounts Payable (GENERALLY ON CREDIT SIDE)
- Examples of Owner's Equity Account-Capital (GENERALLY ON CREDIT SIDE)
Divided into non-current and non-current assets
As a general rule, current assets are expected to be held for a year or less, Non-current greater than a year.
As a general rule, current liabilites are expected to be re-paid in 1 year, Non-current longer than a year.
Statement of Cash Flows
Shows Cash Inflows and Outflows
Shows cash position of an entity (useful for showing solvency e.g. ability to pay debts)
Three types are Operating, Investing and Financing Activities
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