Purpose of a Trial Balance: 1.Trial Balance acts as the first step in the preparation of financial statements. 2.Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. 3.Trial balance ensures that the account balances are accurately extracted from accounting ledgers. 4.Trail balance assists in the identification and rectification of errors.

What is SEC? The United States Securities and Exchange Commission (the SEC), one of the most prominent federal regulatory agencies, states that its mission "is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." SEC Mission: *.Insider trading *.Accounting fraud *.False or misleading investment information SEC Reach: *.Securities exchanges *.Securities brokers and dealers *.Investment advisors *.Mutual funds.

Is trial balance an account? Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements.

Double Entry Accounting Double Entry Accounting Overview Double entry accountingis a record keeping system under which every transactionis recorded in at least two accounts; there is no limit on the number of accounts used in a transaction, but the minimum is two accounts.There are two columns in each account, with debitentries on the left and creditentries on the right. In double entry accounting, the total of all debit entries must match the totalof all credit entries. When this happens, the transaction is said it be "in balance." If the totals do not agree, the transaction is said to be "out of balance," and you will not be able to use the resulting information to create financial statements. Double Entry Accounting Definitions The definitions of a debit and credit are: *.Adebitis an accounting entry that either increases an assetor expenseaccount, or decreases a liabilityor equityaccount. It is positioned to the left in an accounting entry. *.Acreditis an accounting entry that either increases a liabilityor equityaccount, or decreases an assetor expenseaccount. It is positioned to the right in an accounting entry. Anaccountis a separate, detailed record associated with a specific asset, liability, equity, revenue, expense, gain, or loss. Examples of accounts are: *. Cash(asset account: normally a debit balance) *. Accounts receivable(asset account: normally a debit balance) *. Inventory(asset account: normally a debit balance) *. Fixed assets(asset account: normally a debit balance) *. Accounts payable(liability account: normally a credit balance) *.Accrued liabilities (liability account: normally a credit balance) *.Notes payable (liability account: normally a credit balance) *. Common stock(equity account: normally a credit balance) *. Retained earnings(equity account: normally a credit balance) *. Revenue- products (revenue account: normally a credit balance) *.Revenue - services (revenue account: normally a credit balance) *. Cost of goods sold(expense account: normally a debit balance) *. Wageexpense (expense account: normally a debit balance) *.Utilities (expense account: normally a debit balance) *.Travel and entertainment (expense account: normally a debit balance) *. Gainon sale of asset (gain account: normally a credit balance) *. Losson sale of asset (loss account: normally a debit balance)

Double Entry System The field of accounting—both theolder manual systems and today'sbasic accounting software—is based on the 500-year-old accounting procedure known asdouble entry. Double entry is a simple yet powerful concept: eachand every one of a company's transactions will result in an amount recorded intoat leasttwoof the accounts in the accounting system. The Chart of Accounts To begin the process of setting up Joe's accounting system, he will need to make a detailed listing of all the names of the accounts that Direct Delivery, Inc. might find useful for reporting transactions. This detailed listing is referred to as a chart of accounts. (Accounting software often provides sample charts of accounts for various types of businesses.) As he enters his transactions, Joe will find that the chart of accountswill help him select the two (or more) accounts that are involved. Once Joe's business begins, he may find that he needs to add more account names to the chart of accounts, or delete account names that are never used. Joe can tailor his chart of accounts so that it best sorts and reports the transactions of his business. Because of the double entry system all of Direct Delivery's transactions will involve a combination of two or more accounts from the balance sheet and/or the income statement. Marilyn lists out some sample accounts that Joe will probably need to include on his chart of accounts: Balance Sheet accounts: *.Asset accounts (Examples: Cash, Accounts Receivable, Supplies, Equipment) *.Liability accounts (Examples: Notes Payable, Accounts Payable, Wages Payable) *.Stockholders' Equity accounts (Examples: Common Stock, Retained Earnings) Income Statement accounts: *.Revenue accounts (Examples: Service Revenues, Investment Revenues) *.Expense accounts (Examples: Wages Expense, Rent Expense, Depreciation Expense)

Examples of Double Entry 1. Purchase of machine by cash DebitMachine (Increase in Asset) CreditCash (Decrease in Asset) 2. Payment of utility bills DebitUtility Expense (Increase in Expense) CreditCash (Decrease in Asset) 3. Interest received on bank deposit account DebitCash (Increase in Asset) CreditFinance Income (Increase in Income) 4. Receipt of bank loan principal DebitCash (Increase in Asset) CreditBank Loan (Increase in Liability) 5. Issue of ordinary shares for cash DebitCash (Increase in Asset) CreditShare Capital (Increase in Equity)

#What is SEC? The United States Securities and Exchange Commission (the SEC), one of the most prominent federal regulatory agencies, states that its mission"is to protect investors, maintain fair, orderly, and efficient markets,and facilitate capital formation." SEC Mission:The principal way that the SEC fulfills its mission is bycreating and enforcing regulations that set the standardsfor the public disclosure of financial information by public companies. Its main areas of enforcement activity are: *.Insider trading *.Accounting fraud *.False or misleading investment information SEC Reach:The oversight exercised by the SEC extends to allcategories of participants in the securities markets, primarily: *.Securities exchanges *.Securities brokers and dealers *.Investment advisors *.Mutual funds SEC Locations:The SEC employs approximately 3,500 staff in Washington, DC and in 11 regional offices: *.New York *.Boston *.Philadelphia *.Miami *.Atlanta *.Chicago *.Denver *.Fort Worth *.Salt Lake City *.Los Angeles *.San Francisco

Users of Accounting Information - Internal & External Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization. Internal users(Primary Users)of accounting information include the following: *.Management:for analyzing the organization's performance andposition and taking appropriate measures to improve the company results. *.Employees:for assessing company's profitability and its consequence on their future remuneration and job security. *.Owners:for analyzing the viability and profitability of their investment and determining anyfuture course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users(Secondary Users)of accounting information include the following: *.Creditors:for determining the credit worthiness of the organization. Terms of credit are set by creditors according tothe assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. *.Tax Authourities:for determining the credibility of the tax returns filed on behalf ofthe company. *.Investors:for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. *.Customers:for assessing the financial position of its supplierswhich is necessary for them to maintain a stable source of supply in the long term. *.Regulatory Authorities:for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information informing their decisions. External users are communicated accounting information usually in the form of financial statements.

4. Illustration of applying double-entry accounting system Let's use an illustration. A company, called Huske's Consultants, started its operationson January 1, 20X6 when the owner, Mrs. Huske, contributed cash to the business. All accounts had zero beginning balances before this capital contribution. We will see how each transaction affects T accounts and the accounting equation. Transaction impacts on the financial statements will be shown in a horizontal statements model. All events are numbered and their numbers are used as recording references. Recall that there are four types of accounting events: Asset source transactions Asset use transactions Asset exchange transactions Claims exchange transactions The transaction type will be indicated for each accounting event. All transactions took place during 20X6. Due to the space limitations, we will not show all accounts while explaining a transaction. Only those accounts that are affected by a particular transaction will be shown in the accounting equation. In the cash flow section of the horizontal model,OA,FAandIAstand for operating, financing andinvesting activities, respectively. 4.1. Analysis of cash contributiontransaction Event No. 1:On January 1, 20X6 the owner made a $10,000 cash contribution. This accounting event acts to increase both assets (Cash) and equity (Contributed Capital). The increase in the Cash account is recorded as a debit and the increase in the Contributed Capital account (equity) is recorded as a credit: Illustration 2: Effect of a capital contribution in T accounts Assets = Liabilities + Equity Cash Contributed Capital Debit (1) + 10,000 Credit (1) + 10,000 This is an asset source transaction: Illustration 3: Effect of a capital contribution in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 10,000 = n/a + 10,000 n/a - n/a = n/a 10,000 FA 4.2. Analysis of supplies purchase on account transaction Event No. 2:On May 15, Huske's Consultants purchased $400 worth of office supplies from a local supply company on account (i.e., agreed to pay for them on a later date). Purchasing supplies onaccount acts to increase assets (Supplies) and liabilities (Accounts Payable). The Supplies account is debited and the Accounts Payable account is credited: Illustration 4: Effect of a suppliespurchase in T accounts Assets = Liabilities + Equity Supplies Accounts Payable Debit (2) + 400 Credit (2) + 400 This is an asset source transaction: Illustration 5: Effect of a suppliespurchase in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 400 = 400 + n/a n/a - n/a = n/a n/a

Double-entry Accounting System T-account, debit, credit, and account balance; double entry bookkeeping system; general journals, ledgers, posting process; closing entries. 1. Introduction to double-entry accounting system This tutorial is devoted to the technique used by most accountants in the world. The technique is called thedouble-entry recording system. To understand it better we are introducing a T account: T accountis an individual accounting record that shows information about increases and decreases in one balance sheet or income statement account. T account is so called because it has the form of letter T. On the top of the horizontal bar there is the account title. Account decreases and increases are placed on the either side of the vertical bar: Account Title Decreases & Increases Increases & Decreases The left side of the T account is called adebit, and the right side iscalled acredit. Debitis the left side of a T account. Creditis the right side of a T account. Often these two terms are abbreviated as Dr and Cr. It is common to say that an account has beendebitedwhen an amount is placed on the left side of an account, andcreditedif an amount is placed on the right sideof the account. Account balanceis the difference between the debit side and the credit side of a T account. Now we can define the double-entry system: Double-entry recording systemprovides for the equality of total debits and total credits. 2. Double-entry accounting system and its rules The double-entry rules can be helpful when we need to find a mistake in financial records. If total debits do not equal total credits, there must be a mistake. However, this system cannot ensure complete accuracy. For example, even if debit balances equal credit ones, an error may still be present because a wrong account was debited (or credited)when the entry was made. The two important rules about the double-entry recording system are as follows: Assets = Claims (Liabilities and Owner's Equity) and Total Debits = Total Credits 3. Effects of debits and credits on accounts Let us see how debits and credits affect accounts. As we mentioned earlier, a debit is the left side and a credit is the right side of an account. Increases and decreases are recorded differently for asset and claim accounts. Here is what we mean: 1.Debit entries increase asset accounts, and decrease liability and equity accounts. 2.Credit entries increase liability and equity accounts, and decrease asset accounts. Illustration 1: Effects of debits and credits in T accounts An easy way to remember these rules is to learn that increases are posted on the outsides (see plus signs above) and decreases are posted on the insides (see minus signs above). That rule holds true for asset as well as liability and equity accounts.

Illustration 13: Cash flow categories [graph] 10. Financial statements model To better understand the effects of transactions on financial statements and see the relationships between a financial statement's elements, a statements model can be created. There are two forms of a statements model: vertical and horizontal. As its name implies, the vertical model arranges financial statement elements fromtop to bottom on a page. The horizontal model arranges financial statement elements horizontally across a page. In the horizontal model, the balance sheetis presented to the left, followed by the income statement, and the statement of cash flows. Let us demonstrate the usefulnessof the horizontal model and apply it to the five transactions we covered earlier. Note that if a transaction does not affect the model, a related cell in the table below shows "n/a". In the statement of cash flows,FAmeanscash flows from financing,IAmeans cash flows from investing, andOAmeans cash flows from operating activities. 1.Obtained capital acquisition:$5,000 2.Borrowed cash: $2,000 3.Received cash revenue: $3,000 4.Paid expenses with cash: $1,000 5.Distributed cash to owners:$500 Illustration 14: Horizontal statements model for Friends Company Event No Balance Sheet Income Statement Cash Flow Cash = Liabilities + Equity Rev. - Exp. = Net Income 1 5,000 = n/a + 5,000 n/a - n/a = n/a 5,000 FA 2 2,000 = 2,000 + n/a n/a - n/a = n/a 2,000 FA 3 3,000 = n/a + 3,000 3,000 - n/a = 3,000 3,000 OA 4 (1,000) = n/a + (1,000) n/a - (1,000) = (1,000) (1,000) OA 5 (500) = n/a + (500) n/a - n/a = n/a (500) FA Totals 8,500 = 2,000 + 6,500 3,000 - (1,000) = 2,000 8,500 With respect to Events 1 and 2, it is clear that only the balance sheetand the statement of cash flows are affected. There is no effect on the income statement. Furthermore, you can see that Event 1 increases assets and equity and that the cash inflow is defined as a financing activity. Event 2 has a similar effect, exceptthat liabilities increase instead of equity. Event 3 affects three financial statements. Assets and equity increase on the balance sheet. Therevenue recognition causes net income to increase, and the cash inflow is shown as an operating activity on the statement of cash flows. Event 4 is the opposite of Event 3. Assets, equity and net income decrease. Cash flow statement shows this decrease as an operating activity. Finally, Event 5 shows a decrease in cash and equity. The cash distribution is not shown anywhere in the income statement. That's because distribution is not an expense andthus, it is not included in the determination of net earnings. The cash distribution is categorized as a financing activity in the cash flow statement. Using the horizontal model helps in understanding the effects produced by each event, so it is advisable to use it as often as possible while learning the principles of financial accounting.

9.3. Presentation of the balance sheet The balance sheetis presented as follows: Illustration 11: Balance sheet forFriends Company Friends Company Balance Sheet Period Ended 20X6 Assets $8,500 Total Assets 8,500 Liabilities 2,000 Equity Contributed Capital 5,000 Retained Earnings 1,500 Total Equity 6,500 Total Liability and Equity (Claims) 8,500 The balance sheet lists assets and corresponding claims (liabilities and equity). Any asset has a source, so assets balance with claims. That is why total assets equal the sum of total liabilities and equity. 9.4. Presentation of the statement of cash flows The statement of cash flowshas the following format: Illustration 12: Statement of cash flows for Friends Company Friends Company Statement of Cash Flows For the Period Ended 20X6 Cash Flows from Operating Activities Cash Receipts from Customers $3,000 Cash Payments for Expenses (1,000) Net Cash Flow from Operating Activities 2,000 Cash Flows from Investing Activities 0 Cash Flows from Financing Activities Cash Receipts from Borrowing 2,000 Cash Receipts from Capital Acquisitions 5,000 Cash Payments for Distributions (500) Net Cash Flow from Financing Activities 6,500 Net Increase in Cash 8,500 Plus: Beginning Cash Balance 0 Ending Cash Balance $8,500 The statement of cash flows explains how the company obtained and used cash during a period. Sources of cash are calledcash inflows, and uses of cash are known ascash outflows. Cash inflowsare sources of cash;for example, payments from customers, capital acquisitions, etc. Cash outflowsare uses of cash; for example, payments to vendors, paying off bank loans, etc. The statement classifies cash inflows and outflows into three categories: Operating activitiesexplain cash generated through revenue and cash spent for expenses. Investing activitiesinclude cash received or spent on productive assets and investments in the debt or equity of other companies. Financing activities describe cash transactions associated with resource providers (i.e., owners and lenders.)

9. Financial statements description Using the five transactions described above, we can now prepare the company financial statements for the period. Recall that there are four general-purpose financial statements: Income Statement Statement of Changes in Equity Balance Sheet Statement of Cash Flows 9.1. Presentation of the income statement An income statementis presented below. (We will not go into detail on the preparation of financial statements process in this tutorial.That topic will be covered in future tutorials. The financial statements below are presented to give you an idea of what an income statement looks like.) Illustration 9: Income statementfor Friends Company Friends Company Income Statement For the Period Ended 20X6 Revenue (i.e., assets increase) 3,000 Expenses (i.e., assets decrease) (1,000) Net Income (i.e., change in net assets) $ 2,000 The income statement measures the change in net assets or the difference between asset increases and asset decreases from operating activities. The asset increases from the operating activities are labeledrevenues. The asset decreases from the operating activities are calledexpenses. The difference between revenues and expenses is callednet incomeif revenue is greater than expenses or anet lossif vice versa. Note: At this point we don't consider liabilities in the determination of revenues and expenses. Liabilities and how theyimpact revenues and expenses are covered in other tutorials. Net incomeis the excess of revenues over expenses for an accounting period. Net lossis the opposite of net income. Net loss results from the excess of expenses over revenues for an accounting period. 9.2. Presentation of the statement of changes in equity The statement of changes in equityhas the following format: Illustration 10: Statement of changes in equity for Friends Company Friends Company Statement of Changes in Equity Period Ended 20X6 Beginning Contributed Capital $0 Plus: Capital Acquisition 5,000 Ending Contributed Capital 5,000 Beginning Retained Earnings $0 Plus: Net Income 2,000 Less: Distribution (500) Ending Retained Earnings 1,500 Total Equity $ 6,500 The statement of changes in equity explains the effects of transactions on owner's equity during an accounting period. The statement includes the beginning and ending balances of contributed capital and reflects any new capital acquisitions madeduring the accounting period in the contributed capital section. The statement also shows the portion of net earnings retained in the business in the retained earnings section.

The effect of an asset use transaction (assets and claims decrease) on the basic accountingequation is as follows: Illustration 6: Effect of expense recognition Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $10,000 = $2,000 + $5,000 + $3,000 Effect of expenses (1,000) = + + (1,000) Ending balance $9,000 = $2,000 + $5,000 + $2,000 Take a note of how decreases or negative amounts are shown in accounting records. Instead of prefixing a minus sign ("-"), a number is taken into parenthesis. This is a common way of showinga decrease in accounting. 5) If a business chooses to transfer part of its assets (particularly its retained earnings) to the owners, the transfer is calleddistribution. Assume Friends Company transfers $500 of assets to its owners. This is an asset use transaction: Illustration 7: Effect of cash distribution Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $9,000 = $2,000 + $5,000 + $2,000 Effect of distribution (500) = + + (500) Ending balance $8,500 = $2,000 + $5,000 + $1,500 Both distributions and expensesresult in decreases in retained earnings and thus, in equity. The table below is a summary of the effects of the three asset source transactions (events 1 through 3) and two asset use transactions (events 4 and 5): Illustration 8: Summary of transaction effects Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $0 = $0 + $0 + $0 Effect of contribution +5,000 = + +5,000 + Effect of borrowing +2,000 = +2,000 + + Effect of revenue +3,000 = + + +3,000 Effect of expenses (1,000) = + + (1,000) Effect of distribution (500) = + + (500) Ending balance $8,500 = $2,000 + $5,000 + $1,500 8. Closing the books: permanent and temporary accounts At the end of an accounting period, all accounts are prepared for the next period. In this regard,it is important to distinguish between permanent and temporary accounts. Balance sheet accounts (i.e., assets, liabilities, and equity) have a continual nature; therefore, they are not closed after each period. That's why they are calledpermanent accounts. Permanent accountsare balancesheet accounts. They are not closed after each period. Their balances are carried forward intothe next period. Permanent accounts are also calledreal accounts. In contrast, revenue, expense, anddistribution accounts are used to collect information about a single accounting period. At the end of aperiod, amounts in revenue, expense, and distribution accounts are transferred to the Retained Earningsaccount. Accordingly, the revenue, expense,and distribution accounts must have zero balances after closing the books at the end of one accounting period and at the beginning of the next period. Temporary accountsare closed at the end of each period. These are mostly income statement accounts, except for a distribution account that is an equity statement account. Temporary accounts are also callednominal accounts. The process of transferring the balances from the temporary accounts to the permanent account (i.e., the Retained Earnings account), is referred to asclosing the accountsorclosing the books.

Illustration 3: Effect of cash contribution Claims Assets = Liabilities + Equity +$5,000 = + +$5,000 Note that the amount of this single transaction is recorded twice. The first time it is recorded as an asset and the second time itis recorded as equity (the asset source). In accounting any transaction is recorded at least twice, as a rule. This rule is knownasdouble-entry bookkeeping. Thedouble-entry bookkeepingrule states that any transaction isrecorded at least twice. Because this transaction providedassets to the company, it is called anasset source transaction. An asset source transaction is one of the four types of accounting transactions. Asset source transactionsresult in an increase in an assetaccountand in one of the claim accounts ( liabilityor equityaccounts). 2) Next, assume that Friends Company acquires an additional$2,000 of assets by borrowing cash from creditors (e.g., taking a loan from a bank). This is also an asset source transaction. In the table below the beginning balances are derived from the ending balances of the previous transaction: Illustration 4: Effect of borrowing Claims Assets = Liabilities + Equity Beginning balance $5,000 = + $5,000 Effect of borrowing +$2,000 = +$2,000 Ending balance $7,000 = $2,000 + $5,000 Equity is usually viewed as a source of assets, and that's why itis necessary to subdivide the owner's interest into two components. First, owners' claims are established when a business acquires assets from owners. These claims result from the contributions of capital resources by the owners; therefore, they arefrequently calledcontributed capital. Contributed capitalis a component of equity resulting from contributions of capital resources by owners. The second source of assets associated with equity occurs when a business obtains assets through its earnings activities. This source is calledretained earnings. Retained earningsare a component of equity resulting from earnings activities. Taking into account the definitions above, the basic accounting equation can be presented like this: Assets = Liabilities + Equity Contributed Capital + Retained Earnings 7. Effects of transactions on the basic accounting equation, cont. 3) An increase in assets resulting from rendition of goods or services to customers is calledrevenue. Earning revenue can be an asset source transaction. To illustrate the effect of a revenue transaction, let's assume that Friends Company received $3,000 cash for services it provided to customers. Note in the illustration below that both assets and retained earnings increase which is a characteristic of an asset source transaction. Illustration 5: Effect of revenue transaction Equity Assets = Liabilities + Contributed Capital + Retained Earnings Beginning balance $7,000 = $2,000 + $5,000 + $0 Effect of revenue +3,000 = + + +3,000 Ending balance $10,000 = $2,000 + $5,000 + $3,000 4) Assets acquired through operating activities are called revenues. Assets used in the process of generating revenues are calledexpenses. Expenses decrease retained earnings. Assume Friends Company used$1,000 in assets to earn the $3,000(see above) in revenues. This is anexample of anasset use transaction. Asset use transactionsresult in a decrease in an asset account and in one of the claim accounts (liability or equity accounts).

4.1. Elements of financial statements All financial statements consist of classes or categories known aselements. There are ten elements:assets, liabilities, equity, contributed capital, revenue, expenses, distributions, net income, gains,andlosses. These elements are explained later in this tutorial or are covered in other tutorials. Assetsare the economic resources a business uses to accomplish its main goal (i.e., increasing the owners' wealth). Formally recognized assets must meet the following two conditions: they must represent a potential economic benefit that is assignable to a particular entity, and an event giving rise to the assignment must have occurred (i.e., a transaction resulting in an asset has already occurred). For example, if a company has purchased a piece of equipment and uses it to generate profits, it is considered as an asset. However, if the company just considers buying new equipment,it can't be deemed or recorded as an asset. 5. Basic accounting equation Before we can proceed with the basic accounting equation we need to understandclaims: A company's assetsbelong to theresource providers who are said to haveclaimson the assets. In other words, each asset has its own source provided by an owner or creditor. So, there can't be a claim without an appropriateasset and vice versa. Based on thisstatement, we can define the basic accounting equation as: Assets = Claims Claims are divided into two categories: Creditors' claims that are calledliabilities Owners' claims that are calledequity Taking this into account, the basicaccounting equation can also be presented as follows: Assets= Claims Assets= Liabilities + Equity Liabilitiesare debts and obligations of a company. Equityis what the company"owes" to owners. Equity is also callednet assetsorresidual equity. The amount of total assets minus total liabilities equals equity. Because equity equals the difference between assets and liabilities, it is also callednet assets. If a company goes bankrupt, liabilities are paid off first to creditors, while equity is the last to be distributed. Therefore, owners' equity is also calledresidual equity. Let us look at an example of the basic accounting equation. Suppose a company has assets of$800, liabilities of $300, and equityof $500. These amounts will be shown in the basic accounting equation as follows: Illustration 2: Example of basic accounting equation Assets = Claims Assets = Liabilities + Equity $800 = $300 + $500 6. Effects of transactions on the basic accounting equation Let us know examine how different transactions affect the basic accounting equation. We will take a look at several transactions separately. 1) Friends Company is created when the owners pool $5,000 into the business. The effect of the contributions on the accounting equation is as follows:

3. Generally Accepted Accounting Principles (GAAP) People and organizations make decisions based on financial information prepared by accountants. That is why it is important for people and organizations to understand the ways in which accounting information is measured. To ensure consistency, rules are established that business people can use to make sure they are comparing oranges to oranges. For example, assume a store sells goods. Should the store's accountant record the sale at the moment the goods are shipped (accrual accounting) or at the timecash for these goods is received (cash accounting)? Whether the store owner applies accrual or cash accounting is not important to interested parties, aslong as the owner follows a rule requiring him to disclose the chosen accounting method for the reporting purposes. Accounting rules such as these are grouped together and calledGenerally Accepted Accounting Principles(GAAP). Generally Accepted Accounting Principles (GAAP)are common standards that guide accountants in reporting economic events. The Financial Accounting Standards Board (FASB) regularly issues Statements of Financial Accounting Standards (SFAS) that comprise a large portion of GAAP. You can find more information about SFAS, their issuance processand current projects on FASB's website. In 2009, all SFAS statements and other pronouncements were included in the Accounting Standards Codification (ASC), which is the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the Securities and Exchange Commission (SEC). Other organizations playing a significant role in regulating the accounting profession are the Securities and Exchange Commissionand the Public Company Accounting Oversight Board (PCAOB). The SEC and PCAOB mostly regulate public companies, while the FASB establishes standards for private companies. 4. Financial reporting and financial statements Businesses communicate accounting information to the public through a process known asfinancial reporting. Financial reportingis the process through which companies communicate information to the public. The central means of external financial reporting is a set of financial statements. There are four general-purpose financial statements: Income Statement Statement of Changes in Equity Balance Sheet Statement of Cash Flows Anincome statementpresents revenues and expenses and resulting net income or net loss for a period of time. An income statement is also called a Statement of Operations, an Earnings Statement, or a Profit and Loss Statement (P/L). Astatement of changes in equityshows all changes in owners' equity for a period of time. This statement is also calledan Owners' Equity Statement. Abalance sheetpresents assets, liabilities and owners' equity on a specific date. A balance sheet isalso called a Statement of Financial Position. Acash flow statementsummarizes information about cash outflows (payments) and inflows (receipts). This statementmay also include certain information not related to actual cash flows. Notes to the financial statements are another important aspect of reporting. Notes can be found in most financial statements and are required to be included in the financial statements of publicly traded companies. Notes include, among other things, additional information about the financial condition and performance of a company. The information presented in the notes may differ greatly from one company to another.

Introduction to Accounting Accounting and double-entry bookkeeping; financial and managerial accounting; basic financial statements (income statement, statement of cash flows, statement of changes in owners' equity and balance sheet); permanent (real) and temporary (nominal) accounts; four types of accounting transactions. 1. Definition of accounting What is accounting? People in thebusiness world consider it to be quite important. When you plan toinvest in McDonald's stock, buy new equipment, or forecast future sales and expenditures, you almost certainly use accounting information. Why? Because, accounting provides information for decision-making in the business world. Accountingis a service-based profession that provides reliable and relevant financial information useful in making decisions. Financial information may include sales, expenses, taxes and other figures. There are three steps to preparing financial information:identification,recordingandcommunication. First, economic events areidentified. A sale at a gas station, payment of taxes by a commercialenterprise, or purchase of insurance are all examples of economic events. Next, all economic events arerecorded. Recording provides a history of a company's financial activities. In this step, economic events are also classified and summarized. Finally, information about classified and summarized economic events iscommunicatedto interested parties. Such communication may take several forms. One such formis a financial statement which youwill read about later in this tutorial. 2. Users of accounting information There are two broad categories ofinterested parties, oraccounting information users: external users internal users External usersare parties outside the reporting entity or company who are interested in the accounting information. Types of external users include: Investors(i.e., owners), who use accounting information to make buy, sell or keep decisions related to shares, bonds, etc. Creditors(i.e., suppliers, banks), who utilize accounting information to make lending decisions. Taxing authorities(i.e., Internal Revenue Service), who need accounting information to determine a company's tax liabilities. Customers, who may need accounting information to decide which products to buy from which companies. Internal usersare parties inside the reporting entity or company who are interested in accountinginformation. Types of internal users include: A company's senior and middlemanagement, who use accounting information to run thebusiness. Employeeswho use accounting information to determine a company's profitability and profit sharing. Financial accountingprovides information that is designed to satisfy the needs of external users. Such reporting is usually done in the form of financial statements. Managerial accountingprovides information that is useful in running a company by internal users. Such reporting is usually accomplished through custom-designed (or managerial) reports. The illustration below shows relationships between the types of accounting and accounting information users. Illustration 1: Types of accounting and accounting information users.