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Basic Fundamentals of Accounting


Financial data is meaningless without accounting principles. To understand that, you have to familiarize yourself with the basic fundamentals of accounting. – PowerPoint PPT presentation

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Title: Basic Fundamentals of Accounting

Basic Fundamentals of Accounting
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Each industry in todays business world operates
with its language likewise, accounting is the
primary language of finance and related
businesses. It helps business owners understand
the financial situation by transmitting the
necessary financial data. It helps translate the
fundamentals of accounting into a completely
tangible report. The scope of accounting makes
it crucial for business owners and beginners to
understand the meaning of accounting. This
article is a part of our definitive guide  basic
accounting principles that explain the importance
and basic fundamentals of accounting. Let us get
started right away!
Meaning of Accounting
  • As defined in our A-Z accounting glossary,
    accounting is a cycle or process that includes
    recording, summarizing, analyzing, and reporting
    of data related to financial transactions. There
    are various components of accounting that one has
    to understand to know the actual meaning and the
    basic fundamentals of accounting.

Record Keeping The primary function that
accounting seeks to accomplish is recording the
various transactions within a business.
Accounting is also known as bookkeeping that
recognizes transactions and prepares them as
records. The process of bookkeeping only deals
with the recording/registering part and nothing
otherwise. It further helps maintain a few books
to record each transaction. Each bookkeeping
procedure is carried out systematically for
smooth functioning and clear understanding.
  • There are three basic methods of recording,
  • Establish a record-keeping system.
  • Monitor each financial transaction.
  • Compile reports to provide a final set of
    financial statements.

Summary Raw financial data is an outcome of
recording transactions Also known as the
preliminary data that is not of much significance
to the business or organization. Since raw
financial data does not play an essential role in
the decision-making process, it is divided into
various categories. Thus, recording transaction
is followed by the process of summarizing. Report
ing Company affairs are a vital responsibility of
the management. Business owners must be familiar
with the various operations carried out within
the business with their money. To understand the
know-how of business operations and effectively
manage the outcomes, owners receive financial
reports. Reports are usually generated and handed
over at the end of each quarter, and once
annually, summarizing all their performance.
Analysis After all, the results obtained so far
are analyzed. Once the process of recording and
summarizing is completed, it is imperative to
come to conclusions. The management team of an
organization or business has to analyze both the
positive and negative points. How does one
analyze the results? Accounting entails the
concept of comparison that enables accounting
professionals to compare earnings, savings,
sales, equity, etc. to analyze and determine the
organizations growth and performance.
Business Accounting Basics The accounting
function of any business revolves around the term
ALOE, which plays a significant role in the
accounting world and helps understand the meaning
of each functionality. It is what the acronym
A-L-O-E means. Accounting Equation A Assets
L Liabilities O E Owners Equity
Objectives of Accounting Record Maintenance As
mentioned earlier in the article, accounting is a
language for transactions. The human brain cant
store infinite information. Wherein, accounting
takes charge of keeping records of all
transactions within a business through the
accounting system. PL (Profit Loss) The
sustenance of any business depends on income
generation. Making profits is very important
while running a business. The profit and loss
accounting chart enable bookkeeping professionals
to determine whether a company is running under
profit or loss.
Optimum Utilization of Resources Resources play a
crucial role in enabling a business to function
smoothly. Optimum utilization of resources helps
a company succeed in the long run. Reports are
one of the key resources that provide timely
records of various business activities. Resource
utility makes it easier for the owners to take
notes of each detail before investing or
depositing money. Financial Estimations Although
business sustainability depends on its profits,
it is not the only factor that interests a
business owner. It is essential to know how much
a business owes its creditors and what amount one
has to pay to its debtors. Enterprises focus on
preparing statements that include all the
financial reports. These statements are termed as
a balance sheet that helps understand the
estimations of financial position.
Decision Making Records of financial reports
help in the process of decision making. The
precise financial information helps owners
understand the business functionalities.
  • Basic Fundamentals of Financial Accounting
  •   Accounting Process
  • The accounting process, also known as the
    accounting cycle, is a series of procedures
    involved in gathering, processing, and reporting
    financial information. Usually, financial data is
    presented as reports in the form of financial
    statements. Before preparing statements,
    accountants need to gather all the transactions
    carried out within a business.
  • Later, accountants have to record and arrange
    them accordingly to obtain the value that is to
    be reported. The process of accounting or the
    cycle doesnt end with the generation of
    financial statements. Various other steps must be
    carried out to set up an ideal accounting system
    for the next process.

  • Steps Involved in Accounting Process
  • Defining Analyzing Transactions
  • Recording Journals
  • Posting in the General Ledger
  • Unadjusted Trial Balance
  • Input Adjustments
  • Trial Balance Adjustments
  • Financial Statements
  • Final Entries
  • Post-Closing Trial Balance
  • Reverse Entries (Optional Step)

2.   Reconciliation Statement It is a document
that begins with the companys account balance
records, carries out addition and subtraction of
settlements in the additional columns, and uses
the adjustments to access the records of the same
account held by a third party. The intention of
creating a reconciliation statement is to provide
independent verification of the correctness of
the balance in the companys performance and to
clarify the differences of accounting
versions. The differences are detailed in the
reconciliation statement that helps determine
what is valid, what is invalid, and if one
requires adjustments. These statements are useful
for both internal and external auditors.
Internally prepared remarks enable auditors to
precisely focus on the reconciling items that are
a significant component of the financial
  • A reconciliation statement is generated in
    various situations. It may include
  • Bank accounts
  • Account Debit
  • Accounts Receivable
  • Accounts Payable

3.   Accounting for Depreciation Depreciation is
an accounting method that allocates the cost of
physical or tangible assets over the expected
life span. Depreciation is important to
understand the amount of asset value spent by a
business. It helps enterprises earn income from
an asset while spending a portion of its cost
each year the asset is used. In case
depreciation on accounts is not considered, it
can drastically affect the profits of a business.
Businesses can depreciate assets in the long run
for accounting and taxation however, according
to the IRS (Internal Revenue Service). Companies
are required to spread the costs out over time
while depreciating assets.
  • 4.   Preparing Final Accounts
  • It is categorized as the accounts that are
    prepared at the end of the fiscal year. It
    provides an accurate ideology of a businesss
    financial situation to the business owner,
    management, or other interested individuals.
    Financial statements are recorded primarily in a
    journal and later transferred to the ledger. In
    the end, the final account is prepared. In
    general, the final account includes the following
  • Trading Account
  • Manufacturing Accounts
  • Profit Loss Account
  • Balance Sheet

5.   Accounting for Private Transactions It is
one of the significant concepts of basic
fundamentals of accounting. Accounting for
private transactions are carried out in the
following financial situations. Bills of
Exchange Consignment Joint Venture Sale of Goods
on an Approval or Return Basis
Conclusion When preparing general-purpose
financial statements, several guidelines need to
be followed. They must be understood by both the
accountants preparing them and the users of these
reports. These guidelines are called Generally
Accepted Accounting Principles or GAAP based on
basic accounting principles and concepts. We
hope this article has helped you understand some
of the basic fundamentals of accounting. For more
accounting information, check out our blog
section on the Imprezz official website. Imprezz
is a small business accounting software that
helps several business owners in India to grow
effectively. We offer a 14 days free trial
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