ACCOUNTING FOR BEGINNERS PDF

adminComment(0)

As such, a better way to understand accounting could be to call it The Language of Financial Decisions. The better the understanding of the language, the better. This explanation of accounting basics will introduce you to some basic accounting basic accounting principles, the revenue recognition principle and the. Accounting Book – bookkeeping, principles, and statements. CFI's Principles of Accounting book is free and available for anyone to download as a pdf. Learn.


Accounting For Beginners Pdf

Author:DONNETTA CARRIER
Language:English, Indonesian, Dutch
Country:Australia
Genre:Science & Research
Pages:613
Published (Last):15.10.2015
ISBN:794-4-53554-751-9
ePub File Size:30.74 MB
PDF File Size:9.36 MB
Distribution:Free* [*Sign up for free]
Downloads:24489
Uploaded by: NEIDA

Accounting Basics. Important Disclaimer. Important Note: The text in this chapter is intended to clarify business-related concepts. It is not intended nor can it. PDF Drive is your search engine for PDF files. As of today we have 78,, eBooks for you to download for free. No annoying ads, no download limits, enjoy . This tutorial will help you understand the basics of financial accounting and its This tutorial has been designed to help beginners pursuing education in.

Cash vs. Accrual Cash method Accrual method Prepaid expenses Unearned revenue Depreciation of Fixed Assets Straight-line depreciation Accumulated Depreciation Salvage value Gain or loss on sale Other depreciation methods Expensing immaterial downloads Amortization of Intangible Assets What are intangible assets?

Straight-line amortization Legal life vs. The only way to pack a topic such as accounting into just pages is to be as brief as possible. In other words, the goal is not to turn you into an expert. Now, having made that little disclaimer, I should state that I do think this book will help you achieve a decent understanding of the most important accounting concepts. So What Exactly Is Accounting? That said, all those professors are right.

At its most fundamental level, accounting is the system of tracking the income, expenses, assets, and debts of a business. A discussion of the most important financial statements used in accounting: How to read each one, as well as what lessons you can draw from each. Assets: All of the property owned by the company. Liabilities: All of the debts that the company currently has outstanding to lenders.

My Asset is Your Liability One concept that can trip up accounting novices is the idea that a liability for one person is, in fact, an asset for somebody else.

For example, if you take out a loan with your bank, the loan is clearly a liability for you. From the perspective of your bank, however, the loan is an asset. Similarly, the balance in your savings or checking account is, of course, an asset to you. For the bank, however, the balance is a liability.

It is, quite simply, a formal presentation of the Accounting Equation. Have a look at the example of a basic balance sheet on the following page. Assets Cash and Cash Equivalents: Balances in checking and savings accounts, as well as any investments that will mature within 3 months or less. Accounts Receivable: Amounts due from customers for goods or services that have already been delivered.

Property, Plant, and Equipment: Assets that cannot readily be converted into cash—things such as computers, manufacturing equipment, vehicles, furniture, etc. Liabilities Accounts Payable: Amounts due to suppliers for goods or services that have already been received.

Notes Payable: Contractual obligations due to lenders e. Retained Earnings: The sum of all net income over the life of the business that has not been distributed to owners in the form of a dividend. It will be explained in more detail in Chapter 4, which discusses the Statement of Retained Earnings. Current vs.

Long-Term Often, the assets and liabilities on a balance sheet will be broken down into current assets or liabilities and long-term assets or liabilities. Current assets are those that are expected to be converted into cash within 12 months or less. Typical current assets include Accounts Receivable, Cash, and Inventory. Sometimes, long-term assets are referred to, understandably, as non-current assets. Property, Plant, and Equipment is a long-term asset account. Current liabilities are those that will need to be paid off within 12 months or less.

The most common example of a current liability is Accounts Payable. One column shows the balances as of the end of the most recent accounting period, and the adjoining column shows the balances as of the prior period-end. This is done so that a reader can see how the financial position of the company has changed over time. For example, looking at the balance sheet on the following page we can learn a few things about the health of the company.

Overall, it appears that things are going well. The only thing that might be of concern is an increase in Accounts Receivable. An increase in Accounts Receivable could be indicative of trouble with getting clients to pay on time. Any asset that is not a current asset is a non-current a.

By default, any liability that is not a current liability is a long-term liability. This is in contrast to the balance sheet, which shows financial position at a point in time. A frequently used analogy is that the balance sheet is like a photograph, while the income statement is more akin to a video. Cost of Goods Sold CoGS is the amount that the company paid for the goods that it sold over the course of the period. All of his costs are overhead— that is, each additional return he prepares adds nothing to his total costs—so he has no Cost of Goods Sold.

His Gross Profit is simply equal to his revenues. Operating Income vs. Non-Operating Expenses are those that are unrelated to the regular operation of the business and, as a result, are unlikely to be incurred again in the following year.

A typical example of a Non-Operating Expense would be a lawsuit. The effect of this focus on Operating Income as opposed to Net Income has been to cause many companies to make efforts to classify as many expenses as possible as Non-Operating with the intention of making their Operating Income look more impressive to investors.

Top 10 Best Accounting Books of all Time

See example on following page. Its retained earnings statement for the year would look as follows. It takes information from the income statement, and it provides information to the balance sheet. When first learning accounting, many people are tempted to classify dividend payments as an expense. Unlike many other cash payments, however, dividends are simply a distribution of profits as opposed to expenses, which reduce profits.

Because they are not a part of the calculation of net income, dividend payments do not show up on the income statement. Instead, they appear on the statement of retained earnings.

For instance, profits are frequently reinvested in growing the company by downloading more inventory for sale or downloading more equipment for production. They are a distribution of profits. Cash Flow Statement vs. Income Statement At first, it may sound as if a cash flow statement fulfills the same purpose as an income statement. There are, however, some important differences between the two.

First, there are often differences in timing between when an income or expense item is recorded and when the cash actually comes in or goes out the door. In September, this sale would be recorded as an increase in both Sales and Accounts Receivable.

And the sale would show up on a September income statement. The second major difference between the income statement and the cash flow statement is that the cash flow statement includes several types of transactions that are not included in the income statement.

The loan will not appear on the income statement, as the transaction is neither a revenue item nor an expense item. It is simply an increase of an asset Cash and a liability Notes Payable. As discussed in Chapter 4, dividends are not an expense.

Therefore, the dividend will not appear on the income statement. It will, however, appear on the cash flow statement as a cash outflow. Categories of Cash Flow On a cash flow statement such as the example on page 39 all cash inflows or outflows are separated into one of three categories: 1.

Cash flow from operating activities, 2. Cash flow from investing activities, and 3. Cash flow from financing activities. Cash Flow from Operating Activities The concept of cash flow from operating activities is quite similar to that of Operating Income. The goal is to measure the cash flow that is the result of activities directly related to normal business operations i. Cash Flow from Investing Activities Cash flow from investing activities includes cash spent on—or received from—investments in financial securities stocks, bonds, etc.

For the most part, this work is done by calculating and comparing several different ratios. Liquidity Ratios Liquidity ratios are used to determine how easily a company will be able to meet its short-term financial obligations. Generally speaking, with liquidity ratios, higher is better. The difference between quick ratio and current ratio is that the calculation of quick ratio excludes inventory balances.

This is done in order to provide a worst-case-scenario assessment: How well will the company be able to fulfill its current liabilities if sales are slow that is, if inventories are not converted to cash? However, a quick ratio of only 0.

But the two businesses are of such different sizes that the comparison is rather meaningless, right? For example, comparing the gross profit margin of two different grocery stores can give you an idea of which one does a better job of keeping inventory costs down.

Gross profit margin comparisons across different industries can be rather meaningless. For instance, a grocery store is going to have a lower profit margin than a software company, regardless of which company is run in a more cost-effective manner.

Financial Leverage Ratios Financial leverage ratios attempt to show to what extent a company has used debt as opposed to capital from investors to finance its operations. There is, however, something to be gained from using leverage. The more highly leveraged a company is, the greater its return on equity will be for a given amount of net income. In short, the question of leverage is a question of balance.

Being more highly leveraged i.

On the other hand, financing a company primarily with loans is obviously a risky way to run a business. Asset Turnover Ratios Asset turnover ratios seek to show how efficiently a company uses its assets.

The two most commonly used turnover ratios are inventory turnover and accounts receivables turnover. Average collection period is exactly what it sounds like: the average length of time that a receivable from a customer is outstanding prior to collection.

Account Options

Obviously, higher receivables turnover and lower average collection period is generally the goal. The two most frequently used liquidity ratios are current ratio and quick ratio. Return on assets and return on equity are the most important profitability ratios.

Inventory turnover and receivables turnover are the most important turnover ratios. The goal of GAAP is to make it so that potential investors can compare financial statements of various companies in order to determine which one s they want to invest in, without having to worry that one company appears more profitable on paper simply because it is using a different set of accounting rules. All publicly traded companies are required by the Securities and Exchange Commission to follow GAAP procedures when preparing their financial statements.

Governmental entities are required to follow GAAP as well. That said, there are a different set of GAAP guidelines created by a different regulatory body for government organizations.

Conditions of Use

So, while they are following GAAP, their financial statements are quite different from those of public companies. For each transaction, one entry is made either an increase or decrease in the balance of cash in the account. Likely the single most important aspect of GAAP is the use of double-entry accounting, and the accompanying system of debits and credits.

With double-entry accounting, each transaction results in two entries being made. If each transaction resulted in only one entry, the equation would no longer balance. Debits and credits are simply the terms used for the two halves of each transaction. That is, each of these two-entry transactions involves a debit and a credit.

Introduction to Financial Accounting

That is, however, not exactly true. This transaction could be recorded as a journal entry as follows: DR. Equipment 40, CR. Cash 40, As you can see, when recording a journal entry, the account that is debited is listed first, and the account that is credited is listed second, with an indentation to the right. Cash Flow from Operating Activities The concept of cash flow from operating activities is quite similar to that of Operating Income. The goal is to measure the cash flow that is the result of activities directly related to normal business operations i.

Cash Flow from Investing Activities Cash flow from investing activities includes cash spent on—or received from—investments in financial securities stocks, bonds, etc. For the most part, this work is done by calculating and comparing several different ratios.

Liquidity Ratios Liquidity ratios are used to determine how easily a company will be able to meet its short-term financial obligations. Generally speaking, with liquidity ratios, higher is better. The difference between quick ratio and current ratio is that the calculation of quick ratio excludes inventory balances. This is done in order to provide a worst-case-scenario assessment: How well will the company be able to fulfill its current liabilities if sales are slow that is, if inventories are not converted to cash?

However, a quick ratio of only 0. But the two businesses are of such different sizes that the comparison is rather meaningless, right?

For example, comparing the gross profit margin of two different grocery stores can give you an idea of which one does a better job of keeping inventory costs down. Gross profit margin comparisons across different industries can be rather meaningless.

For instance, a grocery store is going to have a lower profit margin than a software company, regardless of which company is run in a more cost-effective manner. Financial Leverage Ratios Financial leverage ratios attempt to show to what extent a company has used debt as opposed to capital from investors to finance its operations. There is, however, something to be gained from using leverage. The more highly leveraged a company is, the greater its return on equity will be for a given amount of net income.

In short, the question of leverage is a question of balance. Being more highly leveraged i.

On the other hand, financing a company primarily with loans is obviously a risky way to run a business. Asset Turnover Ratios Asset turnover ratios seek to show how efficiently a company uses its assets. The two most commonly used turnover ratios are inventory turnover and accounts receivables turnover. Average collection period is exactly what it sounds like: the average length of time that a receivable from a customer is outstanding prior to collection.

Obviously, higher receivables turnover and lower average collection period is generally the goal. The two most frequently used liquidity ratios are current ratio and quick ratio.

Return on assets and return on equity are the most important profitability ratios. Inventory turnover and receivables turnover are the most important turnover ratios. The goal of GAAP is to make it so that potential investors can compare financial statements of various companies in order to determine which one s they want to invest in, without having to worry that one company appears more profitable on paper simply because it is using a different set of accounting rules.

All publicly traded companies are required by the Securities and Exchange Commission to follow GAAP procedures when preparing their financial statements. Governmental entities are required to follow GAAP as well. That said, there are a different set of GAAP guidelines created by a different regulatory body for government organizations.

So, while they are following GAAP, their financial statements are quite different from those of public companies. For each transaction, one entry is made either an increase or decrease in the balance of cash in the account. Likely the single most important aspect of GAAP is the use of double-entry accounting, and the accompanying system of debits and credits.

With double-entry accounting, each transaction results in two entries being made. If each transaction resulted in only one entry, the equation would no longer balance. Debits and credits are simply the terms used for the two halves of each transaction.

That is, each of these two-entry transactions involves a debit and a credit. That is, however, not exactly true. This transaction could be recorded as a journal entry as follows: DR. Equipment 40, CR. Cash 40, As you can see, when recording a journal entry, the account that is debited is listed first, and the account that is credited is listed second, with an indentation to the right. Also, this helps you to remember that the debit half of a journal entry is on the left, while the credit half is indented to the right.

To increase Cash an asset account , we will debit it. To increase Notes Payable a liability account , we will credit it. Cash 50, CR. Building Supplies 10, CR. To decrease a liability, we debit it, and to decrease an asset, we credit it. Accounts Payable 10, CR. Naturally, journal entries need to be made for income statement transactions as well. For the most part, when making a journal entry to a revenue account, we use a credit, and when making an entry to an expense account, we use a debit.

We need to decrease Cash and increase Rent Expense. Rent Expense 4, CR. Cash 10, CR. Sales 10, Sometimes a transaction will require two journal entries. Cash 1, CR. Sales 1, DR. Cost of Goods Sold CR.

Of course, hardly anybody uses an actual paper document for a general ledger anymore. T-Accounts In many situations, it can be useful to look at all the activity that has occurred in a single account over a given time period. The Trial Balance A trial balance is simply a list indicating the balances of every single general ledger account at a given point in time.

The trial balance is typically prepared at the end of a period, prior to preparing the primary financial statements. The purpose of the trial balance is to check that debits—in total—are equal to the total amount of credits. If debits do not equal credits, you know that an erroneous journal entry must have been posted. The purpose of a trial balance is to check that total debits equal total credits. Her lease requires her to prepay her rent for the next 3 months at the beginning of every quarter.

For example, in April, she is required to pay her rent for April, May, and June.

You might also like: PHARMACOLOGY FOR NURSES PDF

If Pam uses the cash method of accounting, her net income in April will be substantially lower than her net income in May or June, even if her sales and other expenses are exactly the same from month to month. This is, of course, a distortion of the reality. The Accrual Method Under the accrual method of accounting, revenue is recorded as soon as services are provided or goods are delivered, regardless of when cash is received.

Note: This is why we use an Accounts Receivable account. Similarly, under the accrual method of accounting, expenses are recognized as soon as the company receives goods or services, regardless of when it actually pays for them.

Accounts Payable is used to record these as-yet-unpaid obligations. The goal of the accrual method is to fix the major shortcoming of the cash method: Distortions of economic reality due to the frequent time lag between a service being performed and the service being paid for.

On the 5th of every month, he pays his sales reps their commissions for sales made in the prior month. First, because Mario uses the accrual method, the expense is recorded when the services are performed, regardless of when they are paid for. This ensures that any financial statements for the month of August reflect the appropriate amount of Commissions Expense for sales made during the month.

Second, after both entries have been made, the net effect is a debit to the relevant expense account and a credit to Cash.

Last point of note: Commissions Payable will have no net change after both entries have been made. Its only purpose is to make sure that financial statements prepared at the end of August would reflect that—at that particular moment—an amount is owed to the sales reps. Because Lindsey uses the accrual method, she must record the interest expense over the life of the loan, rather than recording it all at the end when she pays it off.

Naturally, there are occasions in which the opposite situation arises.

Again, the goal of the accrual method is to record the revenues or expenses in the period during which the real economic transaction occurs as opposed to the period in which cash is exchanged. Of course, the process will start all over again on July 1st when Pam prepays her rent for the third quarter of the year. Then, they will record the revenue month by month. This seems obvious, but there are times in which it would appear reasonable for a company to report an asset at a value other than the amount paid for it.

For example, if a company has owned a piece of real estate for several decades, reporting the piece of land at its historical cost may very significantly understate the value of the land. However, if GAAP allowed companies to use any other valuation method—current market value for instance—it would introduce a great deal of subjectivity into the process.

To use the example of real estate again: Depending upon what method you use or who you ask, you could find several different answers for the fair market value of a piece of real estate. Instead, GAAP usually requires that companies report assets using the most objective value: the cost paid for them.

The reason for using such a flawed assumption is that the benefit gained from adjusting the value of assets on a regular basis to reflect inflation would be far outweighed by the cost in both time and money of requiring companies to do so.

Matching Principle According to GAAP, the matching principle dictates that expenses must be matched to the revenues that they help generate, and recorded in the same period in which the revenues are recorded. This concept goes hand-in-hand with the concept of accrual accounting. Similarly, it is the matching principle that dictates that if a company downloads an asset that is expected to provide benefit to the company for multiple accounting periods a desk, for instance , the cost of the asset must be spread out over the period for which it is expected to provide benefits.

However, due to its objective nature, historical cost is generally used when reporting the value of assets under GAAP. This is known as the monetary unit assumption. This is known as the entity concept or entity assumption. Rather, the cost is spread out over several years through a process known as depreciation. Straight-Line Depreciation The most basic form of depreciation is known as straight-line depreciation. Using this method, the cost of the asset is spread out evenly over the expected life of the asset.

He expects the equipment to last for 5 years, by which point it will likely be of no substantial value.

When Daniel first downloads the equipment, he would make the following journal entry: DR. Equipment 5, CR. In this case, Accumulated Depreciation is used to offset Equipment. We make the credit entries to Accumulated Depreciation rather than directly to Equipment so that we: 1. Have a record of how much the asset originally cost, and 2. Have a record of how much depreciation has been charged against the asset already. When Daniel disposes of the asset, he will make the following entry: Accumulated Depreciation 5, Equipment 5, After making this entry, there will no longer be any balance in Equipment or Accumulated Depreciation.

Salvage Value What if a business plans to use an asset for a few years, and then sell it before it becomes entirely worthless? If, however, the asset is sold for less than its net book value, a loss must be recorded. Determining whether to make a gain entry or a loss entry is never too difficult: Just figure out whether an additional debit or credit is needed to make the journal entry balance.

For example, the double declining balance method consists of multiplying the remaining net book value by a given percentage every year. The percentage used is equal to double the percentage that would be used in the first year of straight-line depreciation.

Another GAAP-accepted method of depreciation is the units of production method. Under the units of production method, the rate at which an asset is depreciated is not a function of time, but rather a function of how much the asset is used.

Given the fact that a wastebasket is almost certain to last for greater than one year, it should, theoretically, be depreciated over its expected useful life. The benefit of the additional accounting accuracy is far outweighed by the hassle involved in making insignificant depreciation journal entries year after year.

As a result, assets of this nature are generally expensed immediately upon download rather than depreciated over multiple years. Such a download would ordinarily be recorded as follows: Office Administrative Expense Common intangible assets include patents, copyrights, and trademarks.Bookkeeping and Accounting Systems paying for these downloads quickly. This financial statement is also called the statement of financial condition and the statement of financial position.

The difference between quick ratio and current ratio is that the calculation of quick ratio excludes inventory balances. A: In the last line in its income statement, which summarizes the sales revenue, income, expenses, and losses of the business for the period.

For example, a business may keep hundreds of separate inventory accounts, every one of which is listed in the adjusted trial balance. The accountant decides how to measure sales revenue and expenses to determine the profit or loss for the period.