The Basic Accounting Concepts Accounting Essay

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Introduction

Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal all credits. If they don't, the entry is out of balance. That's not good. Out-of-balance entries throw your balance sheet out of balance.

Therefore, the accounting system must have a mechanism to ensure that all entries balance. Indeed, most automated accounting systems won't let you enter an out-of-balance entry-they'll just beep at you until you fix your error.

Depending on what type of account you are dealing with, a debit or credit will either increase or decrease the account balance. (Here comes the hardest part of accounting for most beginners, so pay attention.) Figure 1 illustrates the entries that increase or decrease each type of account.

Basic Accounting Concepts

As we saw in the previous chapter, accounting is based on 5 basic account types: Assets, Liabilities, Equity, Income and Expenses. We will now expand on our understanding of these account types, and show how they are represented in GNU Cash. But first, let's divide them into 2 groups, the balance sheet accounts and the income and expense accounts.

Balance Sheet Accounts

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The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in value of things you own or owe.

Assets is the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash.

Liabilities is the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time.

Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expense Accounts

The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of these accounts.

Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase the value of your Assets and thus your Equity.

Expenses refer to money you spend to purchase goods or services provided by someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for the expense on credit you increase your Liabilities.

Primary & Secondary Business Activities

Management / Accounting

Monitoring of agency staff time by providing project and task descriptions, allocation of staff resources and subsequently recording levels of effort expended on individual tasks by each project member. The information this satisfies many operational needs (such as payroll and cost recovery for cleanup) and also supports management decision making (such as budgeting and program coordination).

Cash flow

The cash flow statement is simply an analysis of the cash received and paid out by the business during a period. It is arranged in such a way that it will enable readers to derive helpful insights to the sources and uses of cash over the period. It may seem strange that one particular asset (cash) is highlighted in this way when others, e.g. stock, are not. A firm’s cash flow is the net amount of money it actually receives in a given period. One of the big problems in starting a new business is that cash flow at the beginning, before the firm has succeeded in finding customers, is bound to be low.

Accounting

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It represents the informational system, which defines, quantifies and evaluates firm’s economic activity. Many external as well as internal users of accounting information employ this informational source, which enables one to facilitate through its redeemable ability and accounting statements, the mineralization of risks associated with performing the business activity or with a course of the managerial and decision-making processes.

Funding

Application for and management of granted funds from EPA and other stakeholders.

Grant Administration

Administration of grants assigned by the agency to organizations charged with supporting the agencies activities.

Human Resource Management

Create a supportive work environment and provide training and developmental opportunities to develop a workforce that reflects the diversity of the community Ecology serves.

Revenue Generation

Implementation of the agencies fee-based cost recovery approach. This includes the defining of the fee rules, the calculation and production of invoices, and the administration of payments received from the fee payers. Although the fee rules tend to be very program specific, the mechanisms for invoicing and payment receipt can be standardized.

1. Sales

Total sales of products and/or services in a trading year can be referred to as: sales, services, fees and or subscriptions. This information can be sourced from copies of sales invoices issued by your business, the rolls of till receipts if using a cash register, the totals from your cash receipts book, and or bank deposit slips.

If you business generates income in another manor different to the core nature of the business, you will need to add another line under sales called other income. Examples of "other income" include: rental of equipment, sale of assets, interest on bank accounts held in the name of the business, and or any other income earned through investments in the name of the business.

2. Cost of Goods Sold

Cost of Goods Sold (COGS) refers to the total value of the goods sold to your customers during a specified period of time. COGS (also, cost of sales or cost of revenue) describes the direct expenses incurred in producing a particular good for sale, including the actual cost of materials that comprise the good, and direct labor expense in putting the good in salable condition. The calculation for COGS is:

Opening stock + Purchases made - Closing Stock = Cost of Goods Sold

COGS does not include indirect expenses such as office expenses, accounting, shipping department, advertising, and other expenses that cannot be attributed to a particular item for sale.

"Cost of sales" does not usually apply if you supply a service only. Total revenue less cost of goods sold equals your gross profit.

The calculation for cost of sales can include:

The cost of stock you buy for resale

Interest on loans to buy stock or production equipment

Components/raw materials to make your product

Labor to produce the product

Machine hire

Small tools

Any other directly related production costs.

Please note there is additional information on how to calculate Cost of Goods Sold, in our excel template Profit & Loss Statement, (download available).

3. Expenses

These are all the ongoing expenses associated with running your business that you can deduct from your "gross profit" figure on your profit and loss account to calculate a figure of "profit before taxation".

Legitimate business expenses for accounting purposes are:

Employee costs

Repairs

Motor expenses

Advertising

Bad debts

Other finance charges

Any other expenses

Premises costs

General administration

Travel

Interest

Legal/professional costs

Depreciation or loss - profit - on sales of equipment

Note that some elements of these expenses are not allowed for tax purposes and are added back before your taxable profit is calculated.

Net Profit

The net profit generated by your business is the best indicator of what action is required and or corrective action. If the net profit is small then your efforts may be better directed toward other activities. A small net profit can also highlight the need to increase profit margins or confirm that the service is very close to cost neutral. You need to review your net profit in light of the circumstances surrounding your business.

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Net profit is calculated by deducting from gross profit the operating expenses such as cleaning, wages, paper bags and other items that do not affect the cost of goods sold.

Other considerations to take into account:

Cost of equipment

Any items of equipment purchased are called "capital expenditure" or "fixed assets".

These might include:

Furniture

Computer equipment

Motor Vehicles necessary for the business

Machinery

Capital purchases cannot be deducted from your net profit in the same manner that expenses are. Having said this you still need to keep accurate records because you are entitled to spread the cost of a capital purchase over several accounting periods, this is called depreciation and is an expense item in your profit and loss statement.

Conclusion

Business finances are the system of monetary relations, into which the corporation on acquiring financial sources enters, on their placing and binding in individual property components with the aim to exploit productively the property and to distribute the results achieved.

Monetary relations constituting the content of business finances can be divided from the aspect of their character, from the viewpoint of subjects among which they are formed and according to the sphere of the corporate activity, or from other aspects.