Accounting fundamentals, or "This is where we start in accounting"

Accounting fundamentals

Well, let’s first understand the basic premise, or system, of accounting. Chances are, you came to this page hoping to learn how to do up the accounts for your business concern. Or you might be a student trying to understand the accounting fundamentals and basic concepts.

This section will lead from recording business transactions correctly, to presenting a final set of financial statements – reports that can be shown to any outsider to your business how much profit (or loss) your business has made, what is owned and owed by the business at a certain date, and how much cash has been received and used.

So feel free to explore accordingly.

To start with the fundamentals, first understand the accounting equation. Once you understand this, you will find it easy to record ANY business transaction.

Go here The Accounting Equation.

Then, you will need to understand how to record a business transaction into the form of an accounting entry.

Go here Double Entries.

All these accounting entries, once recorded, will need to be categorized accordingly into individual accounts. We call this process the posting process. At the end of each accounting period (usually a year), an unadjusted trial balance is prepared.

For more details, go to Posting Journal Entries.

Different accounts will tend to show different balances, depending on their category within the accounting equation. This is explained in the discussion on normal balances.

For more details, go to Normal Balances.

At the end of the accounting period (usually a year), certain accounts need to be adjusted based on certain information, in an adjusting process.

For more details, go to Adjusting Entries.

Finally, the financial statements are prepared – these refer to the final reports to be shown to business outsiders mentioned earlier – based on the adjusted trial balance.

For more details, go to Drafting Financial Statements.

And then, some final housekeeping to prepare the accounting records for next year, the accounts need to go through a closing process.

For more details, go to Closing Entries.

There is one more financial statement, the cash flow statement that is usually prepared. This shows cash movements in the business over the past period, and is prepared after the first 3 financial statements (income statement, statement of owner’s equity and balance sheet).

For more details, go to Cash Flow Statement.

And to summarise everything in easy steps, go here:

The Accounting Cycle - A Summary

And that's it for the accounting fundamentals!

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