Accounting deals with recording, summarizing and reporting a company's transactions. There are various types of accounting:
A statement is a copy of the bank's account with you. It contains a record of the money paid into your account, money withdrawn, etc.
The balance is the total amount of money in your account.
A balance sheet is a vital part of accounting. It shows your company's financial position at a particular point in time. It could indicate one business to be in a strong financial position and another to be in serious financial difficulties. By comparing balance sheets at different periods it is possible to find out the profit made.
Profit generation is the objective of a business and this requires the preparation ofprofit statements.
Resources, debts and owner's interests are known correspondingly as assets,liabilities and capital:
Assets - anything of value owned by a company.
Liabilities - financial obligations to outside parties such as a loan repayable to the bank.
Capital - the sum of money invested in a business by the owners/partners/shareholders, etc. Capital represents the rights of owners to the assets after the prior claims of outside parties (liabilities) have been satisfied in the event of the business closing.
You set up a business with $1000. This money (Cash) is known as anAsset ($1000). The proprietor has introduced $1000 Capital.
One month later the owner buys a photocopier for $300. The business now has two assets:
Cash $700 + Photocopier $300 =Total: $1000 (Assets)
Capital introduced $1000 =Total: $1000 (Capital)
Six months later the owner decides to borrow $500 from the bank. The asset is increased. However, the company now owes the bank money.
This money owed to the bank is called a Liability:
Therefore the Accounting Equation is:
Assets = Liabilities + Capital
Cost - money that is spent on maintaining a business. This includes wages, equipment, etc.
Expense - is a cost that benefits the company in an accounting period.
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