INTRODUCTION
The section introduces you to the fundamentals of accounting principles, concepts & terminologies. The objective here is to strengthen your concepts and understanding on topics like Revenues, Expenses, Assets, Liabilities, Income statement, Balance sheet, Statement of cash flows, financial ratios etc and their components.
You will become familiar about the accounting principles and watch them in action as we use them to create financial statements. You will understand the importance of financial concepts and its application in managing and reporting day to day business operations. You will learn the concepts of debits and credits as we apply them to record transactions.
We will try to keep all our discussions in story form to make it simple and comprehensible to understand.
THE STORY
This story is about John Constantine. He is a hardworking guy who sees an opportunity in the Car rentals business. After necessary research and market evaluation, he decides to register a company and calls it as “Supreme Car Rentals”. John is a smart man and is very excited about his new company. Though he is very confident about managing day to day operations of the company with clients but is not comfortable enough managing back office and subject matters related to accounting & reporting. John is interested in understanding the financial statements and wants to keep on top of his new business. He decides to seek help from a professional accountant, Laura in this matter.
Laura understands the nature of business from John and realizes that he would be required to capture thousands of transactions per month to run it smoothly. She suggests him to use an accounting software for recording the daily financial transactions. John gets puzzled on hearing the term financial transactions and is skeptical about, what all could be classified under the term financial transactions for his business? Laura explains the term by giving the following examples –
- John will start his business by investing some of his personal savings into it. Against this investment, he will be granted common stocks (shares) in the company. This would be the first transaction in the books of Supreme Car rentals
- Supreme Car rentals is then required to setup an office space with necessary utilities like desk, reception etc. All these purchases/expenses are required to be captured under transactions performed by the company
- Supreme Car rentals will also own assets like cars which it intends to rent out to customers in exchange of fixed charges. Purchase of these assets would be classified as transactions and must be recorded in the books of the company
- The business will begin earning income from its operations generating revenue for the company. Thus, sales performed by business will also be recorded in the books as transactions
- The company will also incur expenses in operating the business, such as salary of employees and expenses related to car maintenance, office maintenance etc. These operating expenses will also be reported as financial transaction performed by the company
With thousands of such transactions recorded per year in the accounting software; John will ensure fast & easy access of the required data he needs to make apt business decisions. At the same time, use of an accounting software will allow him to view all his financial statements at the ease of a click.
John clearly understands the importance of tracking daily business transactions in an accounting software but is still not sure about how these financial statements can help him in making sound business decisions. Laura in response lists the important financial statements and promises him to discuss each of them in detail in the subsequent sessions.
- Income Statement
- Balance Sheet
- Statement of Cash flows
Table of Contents : Accounting Principles
Accounting Principles & guidelines