Basic Fundamentals of Accounting

After taking Accounting 201 in college I believe accounting courses should be included in high school curriculum

. Accounting is not only a challenging and interesting subject but it also; by its nature, teaches students organizational and financial skills. The concepts taught in accounting are important for anyone working in or investing in a business to understand. A basic knowledge of accounting will improve your ability to judge financial investments and manage your personal funds and is a great way to organize your flow of assets and liabilities.

The backbone of financial accounting is the accounting equation, which states that assets equal liabilities plus equity (where equity equals revenue minus expenses). Assets are the resources a company owns or controls, such as cash, land, supplies, buildings, etc. Liabilities are obligations that the company has to pay cash or provide a good or service, the most common liability account is accounts payable. Equity has two parts: contributed capital and retained earnings. Contributed capital is stockholder investment in the company and retained earnings are the company's revenue minus their expenses; if the revenues are more than the expenses there is a net income and if the revenues are less than the expenses then there is a net loss. T-accounts are used to organize the accounting equation; on the left side of the t-accounts are the debits and on the right are the credits. For the assets and the expenses accounts debits are used to increase the account balance, the liabilities, equity, and revenue accounts are increased with a credit. The way these accounts increase with credits and debits keep the accounting equation in balance. For example, if $100 worth of supplies are bought on credit the supplies account (asset account) is debited $100 for the new supplies and the accounts payable account (liability account) is credited $100 for the money owed in the purchase of the new supplies. Since both accounts are increased and equity was unaffected the accounting equation holds true and the assets equal the liabilities plus equity.

With an understanding of the accounting basics we can then look at financial statements. There are four types of financial statements: income statements, statements of retained earnings, statements of cash flows, and balance sheets. Income statements list all of a company's revenues and expenses over a period of time. The result of the revenues minus the expenses will be the company's net income (if positive) or net loss (if negative), which is listed at the bottom of the income statement. A statement of retained earnings shows the effect of the net income (or loss) and the dividends the company paid out over an accounting period on the retained earnings. The statement leads with the retained earnings from the previous period plus the net income from the current period minus the dividends paid during the current period which gives you the current period retained earnings. A statement of cash flows, quite simply, describes the incoming and outgoing cash in the company over a period of time. The bottom of the statement shows the current balance in the cash account. A balance sheet, unlike all the other financial statements, represents a point in time and not a period of time. A balance sheet shows the company's financial position by showing the balance in the assets, liabilities, and equity accounts. Financial statements can be used externally by investors or internally by the company itself to look at and analyze the company's transactions and how their money is moving. Financial statements can also be used to study customer tendencies, like what time of the year is the company busiest and are customers paying mostly with cash or on credit?

Understanding and analyzing financial statements provides us with a good representation of what a company is doing and if it is financially stable. This information helps us make good investments or maybe even understand how our own organization is doing someday. Beyond investments, understanding accounting can help us with personal finances by teaching organizational skills and money management. Accounting is a subject that it is important for everyone to at least have some basic knowledge of, even if they don't intend to be an accounting or business major.

Basic Fundamentals of Accounting

By: Kevin Rush

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