This chapter covers:
• Accounting Basics and its Statements
• Accounting Standards
• Capital & Revenue
• Control Accounts
• Depreciation
, Accounting Basics and its Statements
Accounting standards can be reduced to a few core principles. Here they are, in simple
terms and with examples:
Profit and Loss Statement (Income Statement):
The purpose of this graph is to show a company's profitability over a specified time
period (typically a quarter or year).
Assume a lemonade stand earned $1,000 by selling lemonades and spent $600 for
lemons, sugar, cups, and labor. The profit on the income statement would be $400
($1,000 minus $600).
The balance sheet:
The purpose of a balance sheet is to present a company's financial situation at a specific
point in time, including assets, liabilities, and shareholders' equity.
For example, if you have $2,000 in savings (an asset), owing $800 on a loan (a liability),
and invested $1,200 in your lemonade shop (equity), your balance sheet would show
$2,000 in assets, $800 in liabilities, and $1,200 in equity.
Statement of Cash Flows:
The purpose of this report is to track how cash flows in and out of an organization over a
certain time period.
For example, suppose your lemonade stand made $1,000 in sales, paid $600 in
expenditures, and borrowed $200 from a buddy. Your cash flow statement would show a
net cash increase of $200 ($1,000 minus $600 + $200).
, Accounting standards
can be reduced to a few core principles. Here they are, in simple terms and with
examples:
The Revenue Recognition Principle is as follows:
Rule: Revenue should be recognized when it is earned and realized, regardless of when
the cash is received.
Assume you give a service to a customer in January but don't get paid until February.
When you supplied the service in January, you should record the revenue.
The Principle of Matching:
Rule: Expenses should be matched to the revenues they help generate during the same
accounting period.
For example, if your lemonade stand spends $200 on lemons, sugar, and cups in January
to manufacture lemonades that are sold in January, you should report these expenses in
January to match them with the associated revenue.