Basic Accounting Concepts - An Introduction For Beginners - Business

The definition of accounting is the study of how businesses track their income and expenses. Accounting practices are essential in a business for two major reasons:

In order to understand accounting systems, knowledge of some basic accounting concepts is necessary. The accounting process is comprised of three parts, which include the journal, general ledger, and subsidiary ledgers. Each of these parts provide valuable information to a business owner.

Journal - Each individual transaction entry is entered and recorded in a journal. There are often several different types of journals in a business. Each type of journal records a different type of transaction. For example, a transaction may be classified as a sale, purchase, cash receipt, or cash disbursement. After these transactions are entered and organized in the journal, they are transferred to the general ledger.

General Ledger - After being transferred from the journals to the general ledger, the financial data is organized into three main categories: Assets, Liabilities, and Capital. The account balance is then calculated and a financial report is obtained.

Subsidiary Ledger - The subsidiary ledger provides more specific information that is not able to be provided in the General Ledger, such as the name and demographics of each customer and the customer's balance. This information is obviously important for billing purposes.

Understanding of debits and credits is the foundation of understanding accounting systems. Because every business transaction affects at least two accounts, each transaction is recorded using a double-entry system of debits and credits. Debits are entered on the left side of the balance sheet. Credits are entered on the right side. Costs and Expenses are recorded as debits. Income is recorded as credits. Assets are recorded as debits. Liabilities are recorded as credit. Debits and credits must be equal for all entries.

The following is referred to as the General Accounting Equation:

Assets = Liabilities + Owner's Equity

Assets are things of value that the company owns. Liabilities are what the company owes. Owner's equity (or capital) is the net worth of a business and includes any debt owed to business owners.

For example, say I am buying a car for $10,000. If I borrow $5500 and have saved $4500, my assets are worth $10,000, my liabilities are $5500, and my equity is $4500. If we plug these numbers into the General Accounting Equation, we come up with $10,000 = $5500 + $4500. Note how the equation is balanced.

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