The definition of accounting could be the study of how businesses track their income and expenses. Accounting practices are crucial in a business for two main major reasons:
- To discover no matter if a small business is getting a profit and in what way much profit is it being made.
- To collect financial information for filing tax returns.
So that you can understand accounting systems, comprehension of basic accounting concepts is necessary. The accounting process is composed of three parts, which include the journal, general ledger, and subsidiary ledgers. Every one of these parts provide valuable information to a company owner.
Journal - Each individual transaction entry is entered and recorded in a journal. You will discover often many different varieties of journals in business. Every type of journal records quantity transaction. As an example, a transaction might be classified being a sale, purchase, cash receipt, or cash disbursement. After these transactions are entered and arranged within the journal, they're utilized in the ledger.
General Ledger - After being transferred through the journals for the general ledger, the financial stats are organized into three main categories: Assets, Liabilities, and Capital. The account balance is then calculated and also a financial report is obtained.
Subsidiary Ledger - The subsidiary ledger provides more specific information which is not capable of being provided inside the General Ledger, for example the name and demographics of the customer and the customer's balance. This information is obviously vital for billing purposes.
Comprehension of debits and credits may be the reasons for understanding accounting systems. Because every business transaction affects at least two accounts, each transaction is recorded by using a double-entry system of debits and credits. Debits are entered around the left side in the balance sheet. Credits are entered about the right side. Costs and Expenses are recorded as debits. Earnings are recorded as credits. Assets are recorded as debits. Liabilities are recorded as credit. Debits and credits needs to be equal for many entries.
We have found termed as the normal Accounting Equation:
Assets = Liabilities + Owner's Equity
Assets are things needed the company owns. Liabilities are the company owes. Owner's equity (or capital) is the net worth on the business and includes any debt owed to business owners.
As an example, say My business is purchasing a car for $10,000. Merely borrow $5500 and have saved $4500, my assets count $10,000, my liabilities are $5500, and my equity is $4500. When we plug these numbers into the General Accounting Equation, we come up with $10,000 = $5500 + $4500. Note that this equation is balanced.