Accounting is an essential part of running a business. It involves recording, classifying, summarising, and analysing financial transactions to help enterprises to make informed decisions. Accounting also allows companies to comply with tax laws and regulatory requirements. Therefore, a firm grasp of accounting basics and principles is crucial for every budding entrepreneur or anyone aiming to work in finance. With this knowledge, business owners and financial professionals can make sound financial decisions and ensure the financial health of their organisations.

Accounting Basics

Your Ultimate Guide | Understand the Language of Business | Accounting 101

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Accounting Basics Principles for Financial Professionals
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Accounting Basics Principles for Financial Professionals

Accounting is an essential part of running a business. It involves recording, classifying, summarising, and analysing financial transactions to help enterprises to make informed decisions. Accounting also allows companies to comply with tax laws and regulatory requirements. Therefore, a firm grasp of accounting basics and principles is crucial for every budding entrepreneur or anyone aiming to work in finance. With this knowledge, business owners and financial professionals can make sound financial decisions and ensure the financial health of their organisations.

What is the meaning of accounting? Definition of accounting

Accounting is the process of tracking, recording, analysing and interpreting a business’s financial activity. A crucial aspect of running any commercial enterprise is getting a grip on the accounting basics. Signing up for sound and reliable accounting services is beneficial to assess a business’s financial health, its performance and to fulfil tax obligations.

What is the meaning of accounting

Why should you learn to account?

Accounting is the universal language of business. Therefore, comprehending the accounting definition and critical accounting concepts is helpful to all professionals. 

accounting definition

Better management of your finances

With basic accounting knowledge, you can track your finances, plan and stick to a better budget, and determine reliable investment options.

accounting principles

Contribute effectively on the professional front

You develop a knack for assimilating financial discussions at the workplace and even contributing to them. Accounting basics can give you a clear picture of the financial conditions of your organisation, ensuring you plan your role in the organisation productively.

accounting ratios

Primed for an entrepreneurial role

If you are an entrepreneur or considering becoming one, you must brush up on the accounting basics. Preparing financial statements, managing costs and payrolls, communicating financial information to stakeholders and investors, and forecasting future sales will allow you to achieve and revise your goals. As a business owner, studying accounting can bring you closer to achieving your business goals and establishing new ones.

accounting vs bookkeeping

Array of career options

The accounting field offers an impressive range of career options, from auditing, public accounting, and tax accounting to managerial accounting. There are professional certifications for every job profile. There are also opportunities in government agencies or corporations and entrepreneurship.

Accounting 101

Accounting might be a term most of us have heard of many times. But we have a myopic view of it. Accounting is much more than just crunching numbers and preparing financial statements. It is a mix of analytical and problem-solving skills. It goes beyond calculating taxes and preparing financial statements. It’s an extensive process of gathering and reporting financial information. Such reports communicate vast information: your business’s cash flows, financial position, and performance.

Proficiency in accounting principles kicks starts with learning accounting basics and concepts. These can help you discover the foundation of accounting. 

Through Accounting 101, we introduce you to the fundamentals of the accounting world, covering the fundamentals of financial reporting, bookkeeping, and other essential concepts. From the skills required to be a successful accountant to what to expect from a regular day as an accountant, you will get a panoramic view of accountancy.  Continue reading this article to learn accounting basics and beyond.

accounting vs finance
Accounting Skill Set
dinancial history

Accounting Skill Set

Accountants require a range of skills beyond numerical proficiency and preparing spreadsheets. For a recession-proof career, there are many technical and soft skills that an accountant must employ daily, including:

  •  analytical and critical thinking abilities, 
  • communication skills, 
  • attention to detail, 
  • strong understanding of business operations. 
  • deep knowledge of tax laws and regulations,
  • relevant accounting standards and principles.

In addition to these technical skills, successful accountants must also have:

  • impressive organisational skills, 
  • the ability to work well under pressure,
  •  a commitment to accuracy and integrity.

By mastering these skills and applying them in real-world scenarios, accountants can significantly impact a business’s financial health and success.

At a glance: The 8 different types of accounting

Different types of accounting exist, and while dealing with accounting 101, it is imperative to be familiar with the multiple accounting types and meanings.

Financial Accounting

The primary objective of financial accounting is to systematically monitor, record, and present financial transactions in the form of financial statements. These statements offer a comprehensive view of a company’s performance during a specific period and are provided to external stakeholders, including investors and financial institutions. Financial accounting encompasses two types of accounting methods, namely cash and accrual accounting, which both employ double-entry accounting principles to ensure precise financial transaction recording. Although cash accounting may be appropriate for small businesses, larger and publicly traded companies use accrual accounting.

Governmental accounting

The objective of governmental accounting is to establish comprehensive monitoring and reporting guidelines for all levels of the government. Unlike financial accounting, governmental accounting involves using distinct funds to track income and expenses. For example, if a county initiates a road improvement project, all related income and expenses would be recorded in a capital projects fund. This tracking system ensures that each fund or program’s performance is accurately reported, and public funds are appropriately utilised.

Public accounting

It provides professional services, such as auditing, tax preparation, tax consulting, and advisory services, which may include financial statement analysis and preparation. Public accounting firms may also extend other financial services to their clients, such as bookkeeping, accounting management, payroll management, and financial consulting.

Cost accounting

It analyses business costs comprehensively, focusing on manufacturing companies, although it can also be applied to service-oriented businesses. Cost accounting examines fixed and variable expenses incurred by a business, including materials, labour, overhead, maintenance, and production costs. This analysis provides management with vital information, such as break-even points, which can help make informed business decisions. 

Forensic Accounting

Forensic accounting assists in investigating the financial activities of both individuals and businesses. Banks, police departments, attorneys, and companies, examine financial transactions and later provide those findings in a completed report. Forensic accountants frequently use data collection and preparation techniques, data analysis, and reporting methods in fraud and embezzlement cases.

Management Accounting

It offers vital information to the management team, empowering them to make knowledgeable choices for the company’s betterment. Therefore, management accounting data is primarily shared with individuals within the organisation. Furthermore, management accounting is focused on the future, devising strategies to operate more efficiently and equipping management with the necessary tools and resources to create effective policies and procedures.

Tax accounting

It ensures that businesses, nonprofit organisations, and individual taxpayers follow all current tax rules and regulations. Tax accountants collaborate with these organisations to ensure precision in calculating and disclosing tax obligations for their clientele. In addition, tax accounting mandates accountants to stay updated with the multiple tax regulations that change every year.


It is designed to provide an independent analysis of that financial activity to ensure that a business is recording transactions following the acceptable rules and standards that apply

A variety of audits may be performed, including the following:

  • Compliance audit: A compliance audit examines the policies and procedures used by a company or a department within a company to determine if it is currently compliant with regulatory standards.
  • Investigative audit: A standard investigative audit may not reveal criminal activity, but it can be the first step in a criminal case should suspicious activity be found.
  • Financial audit: A financial audit is the most frequent and is designed to analyse financial statements for accuracy.
  • Tax audit: A tax audit is typically conducted by the IRS to obtain additional information regarding the accuracy of a tax return.
accounting meaning
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A Day In the Life of an Accountant

Considering a career in accounting? Inevitably, you will want to know about the working day in the life of a professional accountant. A precise description of an accountant’s life might be impossible as every accountant’s days differ. Many accounting roles involve transactional accounting, financial analysis, bookkeeping, cost accounting, management accounting, data analysis, compliance and financial officer related tasks. However, there are a few things one can expect as an accountant.

Using analytical skills: critical thinking is a part of the daily routine in the accounting profession. There will be several tasks requiring your analytical abilities every day.

Handling detail-oriented work: being thorough in daily tasks is another highlight of an accountant’s day. You have to work with precision and accuracy.

Communication: you’ll be called upon to deliver expertise, opinions, and reporting to others. Along with being well-versed in accounting, you should be able to communicate complex technical knowledge in easy-to-understand language.

Using accountancy tech: You can be expected to use tools such as Microsoft Excel, data modelling programs, and financial software to prepare financial statements.

  • Analysing operational costs
  • Budgeting
  • Tax Preparation
  • Auditing financial statements

Basic Accounting Principles

Accounting principles are the rules and guidelines to be adhered to when reporting financial data. The terms and concepts to be used by accountants are standardised, making it easier to examine financial data. The accounting standards International Financial Reporting Standards (IFRS) are the most widely used set of accounting principles. In addition, the United States and many countries use a separate set of accounting principles known as Generally Accepted Accounting Principles (GAAP). Some of the accounting principles include:

  • Accrual principle: It deals with the concept that accounting transactions are to be recorded in the accounting periods when they occur rather than when cash flows are associated with them.

  • Conservatism principle: The principle states recording expenses and liabilities as soon as possible but recording revenues and assets only when they occur.

  • Cost principle: The concept is about a business recording its liabilities, assets, and equity investments only at their original purchase costs.

  • Economic entity principle: The concept declares that business transactions should be recorded separately from that of its owners and other companies.

  • Full disclosure principle: One should include all the information that can affect readers’ comprehension of statements with the financial statements. 

  • Going concern principle: It states that a business will remain in operation for the foreseeable future.

  • Matching principle: The principle is that when you record revenue, you should record all related expenses simultaneously.

  • Materiality principle: The concept is about recording a transaction in records; if not doing it might alter the decision of someone reading the company’s financial statements.

  • Monetary unit principle: The concept is that a business should record transactions only in terms of a currency unit. 

  • Reliability principle: It states that only those transactions that can be proven should be recorded.

  • Revenue recognition principle: The concept defines that revenue should be recognised only when the business has substantially completed the earnings process.

  • Time period principle:  As per this concept, a business should report the results of its operations over a standard period.

Accounting Equation

The financial status of any business, large or small, is based on two critical components of the balance sheet: assets and liabilities. The accounting equation is the foundation of the double-entry accounting system. The accounting equation affirms a company’s total assets being equal to the sum of its liabilities and its shareholders’ equity. This synergy between assets, liabilities, and equity is the foundation of the double-entry accounting system.

Accounting Equation Formula and Calculation

  • Assets = Liabilities + Equity or A = L + E

To find the liabilities simply take equity on the other side of the equation.

  • Liabilities = Assets – Equity
  • Equity = Assets – Liabilities

This is also called the balance sheet equation representing the relationship between assets, liabilities and owner’s equity.

Let’s see an example to understand this better. If Asset is $100mn and Liabilities is $95mn, then using the accounting equation we can find out the equity. 

  • (A) $100mn = (L) $95mn + (E) Equity
  • Hence, Equity = $100mn – $95mn = $5mn
Accounting Equation
Basic Accounting Ratios

Accounting Ratios

Accounting Ratios are ratios used to analyse a company’s business and current financial standing. Accounting ratios also confirm and analyse companies in potential financial distress. Common types of accounting ratios include debt ratios, liquidity ratios, and profitability ratios. We have covered ratios in a separate article. [link to be placed once ready)

Debt Ratios They are also known as solvency ratios and measure a company’s debt relative to various other figures.

Liquidity Ratios Liquidity ratios are similar to debt ratios in calculating a company’s indebtedness. But they do not consider all assets and liabilities of a company in their calculations.

Instead, liquidity ratios restrict their calculations to current assets and liabilities to measure the company’s liquidity or ability to service short-term debt.

Profitability Ratios This category of ratios measures a company’s ability to generate profits from its overall revenue figures by considering expenses or equity.

Key Financial Statements

In accounting, there are key financial statements that are used to communicate a company’s financial performance to its stakeholders. In this section, we have shared some real life financial statements published by Wallmart Inc. Walmart is an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores in the United States, headquartered in Bentonville. You can find all their financial statements and other reports on the investor relations section of their website. 

Let’s start with a profit and loss statement also known as Income Statement.

Income Statement / Profile & Loss (P&L)

The income statement covers a period; a year for annual financial statements for a year and quarterly financial statements for a quarter. The income statement examines revenues, expenses, net income, and earnings per share.

Account basics Profit and Loss

Balance Sheet

A balance sheet is a financial statement containing details of a company’s assets or liabilities at a specific time. A balance sheet is a reference document for investors and other stakeholders to get an idea of the financial health of an organisation. It enables them to compare current assets and liabilities to determine the business’s liquidity or calculate the rate at which the company generates returns.

Accounting Basics Balance Sheets

Cash Flow Statement

The cash flow statement (CFS) determines how productively a company generates cash for the following functions: 

  • to pay its debt obligations,
  • to fund its operating expenses, and investments. 
  • The cash flow statement augments the income statement and the balance sheet.
Account basics Cashflow

Bank Reconciliation

Companies prepare documents to show their recorded bank account matching the balance reported by the banks. Such a document is referred to as a bank reconciliation statement. It compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement. This statement includes all transactions from a given timeframe, such as deposits and withdrawals.

Statement of Changes in Shareholder Equity

It summarises how a company’s equity has evolved during a particular period and explains the differences between the opening and closing balances of equity.

It is a financial statement summarising the transactions related to the shareholder’s equity over an accounting period.

Account basics Sharelonders equity

Statement of Comprehensive Income

Statement of Comprehensive Income refers to the statement which contains the details of the revenue, income, expenses, or loss of the company that is not realised when a company prepares the financial statements of the accounting period, and the same is presented after net income on the company’s income statement.

Account basics Comprehensive Income

Accounting vs Finance

Many speak of accounting and finance in the same breath, but the two have critical differences. It is essential to consider the differences if you wish to pursue an education degree and a career in any of these two fields. 

  • Accounting is about the flow of money in and out of the company, whereas finance is a broader term that deals with managing assets and liabilities. Finance also includes planning for the future growth of the institution. 

  • Accounting encompasses accurate reports about all that has occurred and compliance with the rules and regulations. Finance points to the future and works for money growth and cutting losses. 

  • As an accountant, you will work as a Controller, Tax Manager, Fund Accountant, Valuation Analyst or Financial Reporting Accountant. You can also become a Tax Accountant, Bookkeeper, Treasurer or Auditor for yourself, a business, a nonprofit or the government.

  • Choosing finance can get you the job title of a financial analyst, investment banker, financial examiner, personal financial advisor or a money manager. In addition, you could work in consulting or corporate finance. Banking and insurance underwriting is also open to financing majors. And, of course, entrepreneurship is another route that’s open to finance.

Average Base Salary in US

Salary in Finance field *

$78,667/ yr

Salary for Accountant**

$60, 755/yr.

Accounting vs Bookkeeping

Every business requires a bookkeeping and accounting process to prepare the financial records at the end of a year/quarter. They assist the company in evaluating its worth and make decisions.

Though bookkeeping and accounting are inseparable, there is a fine line to distinguish between them.

  • Booking Keeping is the foundation of accounting. Accounting relies on bookkeeping to prepare financial reports. Therefore, bookkeeping is part of accounting. However, accounting is broader than bookkeeping and makes informed decisions based on data provided by bookkeeping. 

  • The objective of bookkeeping is to maintain detailed records of financial activities; accounting aims to interpret and analyse financial information for informed decisions.

Popular Accounting Qualifications in the world

Accounting certifications are credentials that accounting professionals use to enhance their skill sets and progress professionally. You may choose one of the certifications based on your career path, eligibility criteria, and specialisation.

CFA: The CFA designation is a coveted certification in the finance world. Having three levels, this demanding certification by the CFA Institute can take up to 4 years to complete. 

The main exam topics include ethical and professional standards, quantitative methods, economics, financial reporting and analysis, corporate finance, portfolio management, equity, fixed income, derivatives, and alternative investments.

The curriculum centres around portfolio management and investment analysis. 

CPA: The Chartered Public Accountant is the gold standard in the accounting realm. The curriculum favours those who aim for accounting jobs. It includes auditing and attestation, business environment and concepts, financial accounting and reporting, and regulation. 

FRM: Financial Risk Manager Certification is for you if the profiles of a risk analyst, risk officer and other positions in risk management excite you. It is a niche certification and can be cost-effective. Candidates must pass two rigorous exams and also work two years in the field of risk management. Financial Risk Managers (FRM) are accredited by the Global Association of Risk Professionals (GARP). FRMs specialise in assessing risk for central banks, insurance companies, accounting firms, regulatory agencies, and asset management firms.

CFP: Certified Financial Planner Certification is for those aiming to do well in investment and wealth management. Managing high-net-worth clients is at the forefront of the course.

The Certified Financial Planner Board of Standards, Inc. issues the credentials of a CFP. The education requirements comprise two major components. 

  • at least a bachelor’s degree from an accredited university or college.
  • CFP Board approved the completion of a list of specific courses in financial planning

CMA: Certified Management Accountant Certification can work in corporate financial accounting and strategic management. The Institute of Management Accountants (IMA) offers the CMA professional credential. It vouches for a person’s business management, management accounting, and corporate finance knowledge. To become a CMA, you must:

  • hold a Bachelor’s degree.
  • have two years of work experience in management accounting.

Basic Accounting Terms

Before enrolling for an accountancy course, you must know basic accounting terms. Such knowledge will place you ahead of your peers and give you a better understanding of the field. The technical jargon that you should be familiar with includes:

  • Accounts Payable: Accounts payable refer to the current obligations of an organisation that need to be fulfilled within a short period. These obligations arise from various business transactions, such as the procurement of goods or services and other expenses incurred during the regular course of business. 

  • Accounts Receivable: Accounts Receivable is a component of the current assets section of an organisation’s balance sheet. It shows the amounts owed to the company by its customers or clients for selling goods or services or expenses incurred on their behalf. 

  • Accruals: Accrual refers to an accounting entry made to recognise revenue or expenses that have been earned or incurred but have yet to be recorded in the financial statements. These can include services that have been provided but have yet to be invoiced or expenses that have been incurred but have yet to be paid.
  • Capital: In business, capital refers to the total value of a company’s tangible and intangible assets. It includes cash, equipment, inventory, property, and investments. Capital can also refer to the funds invested in a business by its owners, shareholders, or other investors. 

  • Cashflow: Cash flow refers to the cash and cash equivalents that flow in and out of a company during a specific period, typically a fiscal year. Positive cash flow occurs when a company’s cash inflows exceed its outflows, while negative cash flow occurs when outflows exceed inflows. It shows a company’s cash inflows and outflows for a specific period, 

  • Cost of Goods Sold (COGS) The COGS is the total expenses directly connected with a product’s production. It includes the cost of raw materials, labour, and other direct expenses related to the manufacturing process. COGS is reported on an income statement and does not include marketing, sales, or distribution expenses.

  • Current Assets: Current assets are an organisation’s resources that can be realised quickly, typically within the same financial year. These assets include cash or bank balances and any other asset that can be converted into cash within a short time.

  •  Debit and Credit: When a credit entry is made in an account, it decreases the balance of a real account, signifies a debt owed to a person or entity in the case of a personal account, and increases the income side of a nominal account. An account is debited to increase the balance of a real account, to create a right to receive money from an individual for personal accounts, or to increase the expense side for nominal accounts. 
  • Depreciation: Depreciation is a systematic process of expensing a tangible or physical asset’s cost over its useful life. It reflects an asset’s value decreasing over time due to wear and tear or other factors. Depreciation allows a business to allocate the cost of an asset over its productive life and recognise a portion of that cost as an expense each period, facilitating precise financial reporting of the asset’s impact on the company’s financial statements.

  • Diversification: It is a risk management strategy involving the spread of investments across different industries, geographic locations, and financial instruments to minimise the impact of market volatility on the overall investment portfolio. In addition, by diversifying their investments, investors aim to simultaneously reduce the risk of losing money on all their investments.

  • Equity: Equity is the amount of money invested in a business by its owners, representing their ownership interest in the company. Equity usually takes the form of capital for partnerships or sole proprietorships. For companies, equity can be represented by various shares, such as common or preferred stock, with different denominations, rights, and privileges. Ultimately, equity represents the residual interest in the company’s assets after all liabilities have been settled, and it provides a source of funding for the organisation’s ongoing operations and growth.

  • Fixed Assets: Fixed assets refer to the tangible assets an organisation uses to support its day-to-day operations, such as land, buildings, machinery, equipment, furniture, and fixtures. These assets are not intended to be sold in the short term but are expected to provide long-term benefits to the organisation. 

  • Liabilities: Liabilities refer to the obligations of an organisation, both current (short term) and future (long term), that arise from past transactions or events. Short-term liabilities include debts due for goods and services procured, such as accounts payable, short-term loans and advances, and bills payable. Long-term liabilities include obligations beyond the current year, such as debentures, term loans from banks, and long-term loans and advances. 

  • Overhead Costs: Overhead costs refer to the expenses incurred in running a business that are not directly associated with producing goods or services. These costs are essential for the day-to-day operation of a company and are incurred regardless of whether the business is generating revenue or not. Examples of overhead costs may include rent, utilities, insurance, legal fees, office supplies, advertising, payroll, and accounting.

  • Net Income: The net income of a business is the result obtained after subtracting all the direct and indirect expenses from the direct and indirect revenues. It reflects the business’s earnings at a specific time and helps compare an organisation’s financial position and growth from past years. 

  • Return on Investment: ROI is determined by the division of the net loss or profit generated by an investment by the amount of money invested. Expressed as a percentage, investors use it to calculate the profitability of an investment and compare it to other investment options.

  • Trial Balance: It is a financial statement listing all the debit and credit balances of a company’s ledger accounts. It verifies the mathematical accuracy of the company’s accounting records. It is done by adding up all the debit balances and credit balances to ensure they are equal, which helps identify any errors that may have occurred in the bookkeeping process. The end of an accounting period sees the preparation of the trial balance. It is an essential tool for ensuring the accuracy of a company’s financial statements.
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In conclusion, understanding the accounting basics is for anyone who wants to make informed financial decisions. Accounting provides a framework for tracking and analysing financial data, allowing individuals and businesses to evaluate their financial health and make wise decisions about their future. And if you wish to master the accounting basics through live and tailor-made classes, register for free with Edulyte and figure out the classes that suit your schedule. Our experts are available to guide you in finding the right course. 

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Frequently Asked Questions

What are the basics of accounting?

Accounting is the process of recording, summarising, analysing, and reporting the financial transactions of an enterprise. The basics of accounting include:

  1. Recording transactions 
  2. Classifying transactions
  3. Summarising transactions
  4. Analysing transactions
  5. Reporting

In addition to these basic steps, accounting also involves principles and conventions that guide the recording, classification, and reporting of financial transactions. These include the principles of conservatism, consistency, materiality, and relevance, among others.

Is accounting a good career?

Yes, accounting can be a promising career for those with an aptitude for numbers, attention to detail, and an interest in financial analysis. Here are some reasons why accounting can be a good career choice:

  1. Job stability: Every business requires an accountant to manage its finances, so there will always be a demand for accounting professionals. It makes it a stable career option.
  2. Career growth opportunities: Accounting offers many opportunities for career growth and advancement, such as becoming a CPA, financial analyst, or controller.
  3. Competitive salary: Accounting jobs typically offer competitive salaries, and the earning potential can increase with experience, certification, and job title.
  4. Work flexibility: Many accounting jobs offer flexibility, including part-time and remote work options.
  5. Diverse career paths: Accounting skills can be applied in various industries, including finance, government, education, and healthcare, providing multiple career options.
What are the basic principles of accounting?

The basic principles of accounting provide a framework for recording and reporting financial transactions accurately and consistently. Here are the four basic principles of accounting:

  1. Accrual principle
  2. Consistency principle
  3. Going concern principle
  4. Prudence principle
What are the main types of financial statements?

The main types of financial statements are:

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Statement of Changes in Equity

Businesses use these financial statements, investors and lenders to evaluate a company’s financial performance, position, and cash flow.

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. It is a set of accounting standards and guidelines that companies must follow when preparing their financial statements. These standards ensure consistency, accuracy, and transparency in financial reporting, making it easier for investors, creditors, and other stakeholders to compare and evaluate financial information. 

What are closing entries?

When a financial reporting cycle concludes, the entries made to transfer the balances of temporary accounts (revenue, expenses, and dividends) to permanent accounts (assets, liabilities, and equity) are closing entries.

If I had only one statement and wanted to review the overall health of a company, which statement would I use and why?

Cash is king. In such a case, you would use the Cash Flow Statement. It gives a true picture of the cash generating capacity of a company. Positive cash flow from operating activities (CFO) indicates that the company can fund its activities by generating enough cash from its day to day operations. Other cash flows to look at are cash flow from financing activities (CFF) and cash flow from investing activities (CFI).

What is working capital?

Working capital refers to the amount of cash or liquid assets a company has for its day-to-day operations. It is calculated by subtracting current liabilities (such as accounts payable and short-term loans) from current assets (such as cash, inventory, and accounts receivable).

What does having negative working capital mean?

Negative working capital means a company needs more short-term assets to cover its liabilities. In other words, the company’s current liabilities exceed its existing current assets.

What is the difference between deferred revenue and accounts receivable?

Deferred revenue and accounts receivable are vital balance sheet items in accounting but represent different things.

Deferred or unearned revenue is the money a company receives from a customer before providing a good or service.

On the other hand, money owed to a company by its customers for goods or services already provided is called accounts receivable. Therefore, it is an asset on the balance sheet, representing the money the company expects to receive from its customers.

Which is better, cash basis accounting or accrual accounting?

Both cash basis accounting and accrual accounting has advantages and disadvantages, and the choice of accounting method depends on a business’s specific needs and goals.

Cash basis accounting records transactions when cash is received or paid out. However, it can lead to inaccuracies in financial reporting, as it may not reflect the actual financial position of the company when revenue and expenses are recognised in a different period from when cash is received or paid out.

Accrual accounting records revenue and expenses, irrespective of whether cash has been exchanged. This method accurately reflects a company’s financial position and performance, making it suitable for larger businesses with more complex transactions. However, it can be more challenging to understand and maintain, and it may not provide an accurate picture of a company’s cash flow.

In conclusion, there is no clear winner between cash basis accounting and accrual accounting. Each has its merits and drawbacks, and the choice of accounting method depends on a business’s specific needs and goals.

What is meant by material facts in accounting?

In accounting, material facts refer to any information or events that could significantly impact a company’s financial statements and its stakeholders’ decisions. Materiality is a relative concept and depends on the context of the situation. A fact is considered material if its omission or misstatement could affect the judgement of a reasonable person relying on the financial statements.

What do you mean by offset accounting?

Offset accounting refers to using one account to offset or balance the effects of another account. It is typically done to ensure that financial statements accurately reflect a company’s financial position and performance.

What are the golden rules of accounting?
  1. Debit the receiver and credit the giver: It applies to personal accounts, which include accounts of individuals, companies, and organisations.
  2. Debit what comes in and credit what goes out: It applies to real accounts, which include accounts of assets such as cash, inventory, and equipment.
  3. Debit expenses and losses, credit incomes and gains:

Refer our blog for more – What are the Golden Rules of Accounting

What are some ways to reduce human error in the accounting department?

Here are some ways to reduce human error in the accounting department:

  1. Provide proper training: Ensure that all staff members receive adequate training in accounting procedures and software to reduce errors due to lack of knowledge.
  2. Standardise procedures: Standardise accounting procedures and processes to ensure consistency and minimise the risk of errors.
  3. Use technology: Implement accounting software to automate processes, reduce manual data entry, and minimise the risk of errors due to human intervention.
  4. Double-check work: Encourage staff to double-check their work and establish a framework for oversight and accountability to catch any errors before they become problematic.
  5. Conduct regular audits: Conduct audits of financial records to ensure accuracy and identify errors.
What is the accounting equation?

Assets = Liabilities + Equity or A = L + E

This is also called the balance sheet equation representing the relationship between assets, liabilities and owner’s equity.

What is operating income?

Operating income, or operating profit or earnings before interest and taxes (EBIT), is a financial metric that represents the revenue left over after deducting all of a company’s operating expenses.

What are the Financial Statements?

Financial statements are formal reports that provide information about a company’s financial performance and position. The most common financial statements include the income statement, balance sheet, and cash flow statement.

What is an Accounting Journal?

An accounting journal is a record or logbook of all financial transactions and events that a business or an organisation has

How do I Calculate Depreciation?

To calculate depreciation, you can follow any of the methods below:


  1. Straight-line depreciation: is the most common method and involves dividing the difference between the original cost and salvage value by the asset’s useful life. The resulting amount is the depreciation that should be recorded each year.
  2. Double-declining balance depreciation: This method assumes that the asset depreciates at an accelerated rate early in its useful life and then slows down later. To calculate this type of depreciation, you multiply the asset’s net book value (original cost minus accumulated depreciation) by a percentage twice the straight-line rate.
  3. Units-of-production depreciation: It is used when the asset’s usage varies yearly. To calculate this type of depreciation, you divide the total depreciation of the asset by the total number of units the asset is expected to produce during that time. You then multiply that rate by the number of units produced in a given year to calculate the depreciation for that year.

It’s important to note that different depreciation methods may result in different amounts of depreciation being recorded each year. Hence, it is essential to choose the method that makes the most sense for your business and its assets.

What is Double Entry Bookkeeping?

Double-entry bookkeeping is a method of accounting where every financial transaction has two entries – a debit entry and a credit entry – that are recorded in the general ledger. Such a system ensures that every debit must have a corresponding credit.

What is the difference Between Gross and Net Income?

Gross income (Sales – COGS) refers to the total revenue earned by an individual or business before any deductions are made, such as taxes, insurance premiums, and other expenses. It includes all income sources, such as wages, salaries, tips, interest, dividends, rental income, and capital gains. COGS is the cost of goods sold.

Net income remains after all the deductions have been made from the gross income.

Which financial statement will tell you how profitable a company is?

The income statement tells you how profitable a company is. It summarises a company’s revenues and expenses over a specified period, typically a month, quarter, or year, and reports the resulting net income or loss.


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