The phrase accounting may be the study of how businesses track their income and expenses. Accounting practices are important in business for a few major reasons:
- To find out whether a company is creating a profit and just how much profit is it being made.
- To build up financial information for filing taxes.
As a way to understand accounting systems, knowledge of basic accounting concepts is necessary. The accounting process is comprised of three parts, including the journal, general ledger, and subsidiary ledgers. Each of these parts provide valuable information to your business owner.
Journal - Every person transaction entry is entered and recorded inside a journal. There are often many different kinds of journals in a business. Each kind of journal records quantity transaction. For instance, a transaction might be classified as a sale, purchase, cash receipt, or cash disbursement. After these transactions are entered and arranged within the journal, they can be employed in the overall ledger.
General Ledger - After being transferred with the journals towards the general ledger, the financial stats are organized into three main categories: Assets, Liabilities, and Capital. The account balance might be calculated along with a financial report is obtained.
Subsidiary Ledger - The subsidiary ledger provides more specific information that is not able to be provided inside the General Ledger, just like the name and demographics of every customer plus the customer's balance. This post is obviously vital for billing purposes.
Understanding of debits and credits is the first step toward understanding accounting systems. Because ever see transaction affects at the least two accounts, each transaction is recorded with a double-entry system of debits and credits. Debits are entered on the left side of the balance sheet. Credits are entered for the right side. Costs and Expenses are recorded as debits. Wages are recorded as credits. Assets are recorded as debits. Liabilities are recorded as credit. Debits and credits should be equal for everyone entries.
The following is often called the final Accounting Equation:
Assets = Liabilities + Owner's Equity
Assets are things worthwhile that this company owns. Liabilities are just what the company owes. Owner's equity (or capital) will be the value of the business and includes any debt owed to business people.
For instance, say We're buying a car for $10,000. If I borrow $5500 and possess saved $4500, my assets count $10,000, my liabilities are $5500, and my equity is $4500. Whenever we plug these numbers to the General Accounting Equation, we formulate $10,000 = $5500 + $4500. Note the way the equation is balanced.