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  • September 28, 2022
  • Last Update March 12, 2022 2:43 pm
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4. ACCOUNTING TERMS AND CONCEPTS

There are some accounting terms and ideas that a business manager must be aware of so as to create putting in place an method of accounting easier.

Debits and Credits

An understanding of debits and credits is important within the effective usage of any accounting. Every accounting within the book of account contains both a debit and a credit. Further, all debits must equal all credits. If they don’t, the double-entry system is out of balance.

Therefore, the register must have a mechanism to confirm that all entries balance. Indeed, most automated accounting systems won’t allow you to enter an out-of-balance entry; they’re going to just beep at you until you fix your error. counting on the kind of method of accounting, a debit or credit will either increase or decrease the account balance. for each increase in one account, there’s an opposite (and equal) decrease in another. That’s what keeps the entry in balance.

Assets and Liabilities

Balance sheet accounts are the assets and liabilities for a firm, which, as discussed, must balance.

Identifying Assets. An asset is any item valuable owned by a business. A firm’s assets are listed on its record, where they are go off against its liabilities. Assets may include factories, land, inventories, vehicles, and other items. Some assets (short-term assets), like cash, are easy to value and liquidate, while others (longterm assets), like buildings and farmland, are difficult to value and take longer to liquidate. These varieties of assets are collectively known as tangible assets. Intangible assets, sort of a valued brand such as BMW, don’t show au courant a record, but do contribute to the value of the firm. There are many other intangible assets owned by an organization. Patents, the privilege to use a trademark, and goodwill from the acquisition of another company are such intangible assets. Generally, the worth of intangible assets is whatever both parties comply with when the assets are created. within the case of a patent, the value is commonly linked to its development costs. Goodwill is commonly the difference between the acquisition price of an organization and also the value of the assets acquired (net of accumulated depreciation). Even something that’s not physically in hand, like assets, is an asset because an organization has claim to money due from a customer.

Identifying Liabilities. Liabilities are the alternative of assets. These are the obligations of 1 company to a different. Accounts payable are liabilities and represent a company’s future duty to pay a vendor. So is the loan you took from a bank. A business organizes liabilities into short-term and long-term categories on the record. Long-term debt (claims due in additional than one year) and short-term debt (claims due within a year) are liabilities because they’re claims against the business. If you were a bank, a customer’s deposits would be a liability for accounting purposes, because they represent future claims against the bank.

Owners’ Equity

Owners’ equity is that the difference between assets and liabilities; it increases and decreases a bit like they are doing. Owners’ equity includes factors like partners’ capital accounts, stock, and retained earnings. Stockholders’ equity is additionally what would belong to the company’s owners— the holders of its common stock—after selling the assets and paying off the creditors. Literally, it’s paid-in capital plus retained earnings.

Retained earnings are the accumulated profits after dividends to common shareholders are paid. At the tip of 1 accounting year, all the income and expense accounts are compared to at least one another, and the difference (profit or loss for the year) is moved into the retained earnings account.

Income and Expenses

Further down within the chart of accounts (usually after the owners’ equity section) come the income and expense accounts. Most companies want to stay track of just where they get income and where it goes, and these accounts provide that information.

Income Accounts. A business might want to determine an income account for various income-generating departments of a business. in this way, it can identify exactly where the income is coming from, and also the income of the varied departments may be added together. Different income accounts would be:

✔ Sales revenue.

✔ Interest income.

✔ Income from sale of assets.

Expense Accounts. Most companies have a separate account for each sort of expense they incur. a corporation probably incurs much the identical expenses month after month; thus, once they’re established, the expense accounts won’t vary much from month to month. Typical expense accounts include:

✔ Salaries and wages.

✔ Telephones.

✔ Utilities.

✔ Repairs.

✔ Maintenance.

✔ Depreciation.

✔ Amortization.

✔ Interest.

✔ Rent.

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