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Introduction to Accounting

A simple Definition of accounting is how your business records, arranges and understand the business financial Details. We can think of accounting as large machine that we keep raw financial details into records of all your business transactions, projections, taxes.
Accounting say us whether or not we are making a gain, what is the medium of cash flow and what is the present value of company liabilities and assets.

What is accounting cycle?

Accounting starts the moment you enter a business transaction. Any event and activity that involves our business money into company ledger.

The accounting cycle has six main steps: -
  1. Post transactions to ledger.
  2. Analyze and record transactions.
  3. Prepare and adjust the trail balance.
  4. Make adjusting entries at the end of the period.
  5. Make an unadjusted trail balance.
  6. Prepare financial statements.
What are financial statements?

Financial statements are the report that conclude how your business is performing financially.
There are three major types of financial statements:

  1. The balance sheets
  2. Income statements
  3. And cash flow statements

These all above main types of the financial statements tell us where business’s money is and how it got there. Financial statements can be generated fairly easily using accounting software.

What are Types of Accounting?

The different types of accounting have been explained below:

  1. Financial accounting: - Financial accounting is the specialized branch of accounting that put track of organization financial transaction. The transactions are recorded and conclude and presented in the financial report or statement such that as a balance sheet. It is also necessary to point out that need of financial accounting is not to report the value of organizations or company. Rather its mission is to give enough details for others to assess the value of company for themselves. Because external financial statements are used by different people in variety of methods, financial accounting has common rules called as accounting standards and commonly accepted accounting principles (GAAP).
  2. Managerial accounting: - Managerial accounting is also called as management accounting and it combines many of the topics that are included in price accounting. The managerial accounting is same to financial accounting with two important exceptions. The first exceptions are the statements produced by managerial accounting are for internal use only and second exception is they are produced much more frequently often on quarterly or monthly basis.
  3. Tax accounting: - Tax accounting refers to the ways and policies used for making of tax returns and other statements required for tax compliance and therefore, it gives guidelines and frameworks for arriving at taxable profit. The reason for doing the Income tax accounting is coming at taxable gain and tax payable by doing adjustment in the book profit reached by accounting principles. Tax accounting is circulated by the internal Revenue Service and it is legally need that your tax accounting adheres to Internal Revenue code. Tax accounting is all about preparing of report that you don’t have to pay more tax.
  4. Cost accounting: - Cost accounting involves analyzing all the costs connected with producing an output in order to prepare better decisions about spending, pricing and inventory. Cost accounting fees into managerial accounting because managers use the cost accounting details to prepare better business decisions and also put into financial accounting due to pricing data is often need when compiling a balance sheet.
  5. Credit accounting: - Credit accounting involves analyzing all the organization unpaid bills and liabilities and make sure that organizations cash is not subsequently connected in paying for them. It is one of difficult types of accounting to do well. It generally associated in telling someone somethings and they don’t want to hear.
Accounting Structure: The chart of Accounts

As we know that most of the business users and owners uses the accounting software such as Padisco which is familiar with chart of Accounts in Accounting. The chart of Accounting is the list of all the accounts that organization is taking help by which to post its financial transactions.
Each account has account type and account name. Each account may have assigned the Unique account number. The chart of Account is flexible with new accounts and it can be easily added. But efficient Accounting Systems maintain the lean chart of Account to do proper business and posting analysis easily.

Balance Sheet - Liabilities and Stockholders' Equity

Liabilities: -The balance sheet report mainly delivery’s liabilities as one of the dates fixed in the heading of the balance sheets. Liabilities is defined as the obligation that your business require to fulfill. Liability means also we say as credit. The liabilities need three things:

  1. The obligation in output of previous events.
  2. Presents the business with obligation.
  3. 3. Finishing the obligation will need an outflow of valuable resources.
Types of Liabilities: Current Liabilities

There are various types of liabilities as one of them is current liabilities which is also called as short-term liabilities, which are debts or obligations that requires to be paid within year. Current liabilities should be handled by the management to make sure that company possess enough liquidity from the present assets to guarantee that obligation or debts can be met.

Examples of Current Liabilities are:
  1. Interest payable
  2. Income taxes payable
  3. Account payable
  4. Bills payable
  5. Bank Account payable
  6. Short term loans payable
Non-current Liabilities

This is another type of liabilities. The non-current liabilities also called as long-term liabilities which obligations or debts that are due in complete year time. Long term liabilities are a necessary things of organization long-term financing. Long term liabilities are crucial in calculating company’s long-term solvency.

Some of the list of non-current liabilities are as follows below:
  1. Long-term notes payable
  2. Bonds payable
  3. Capital leases
  4. Deferred tax liabilities
  5. Mortgage payable
Contingent Liabilities

A contingent liability is a type of liabilities that may or may not happens. This means that if there is uncertainty about recording such liabilities in financial accounts. There are two ways by which Contingent liabilities are defined. The first way associated with past events and other one is associated with future events.

Some of the definition of Contingent Liabilities are:
  1. Contingent liabilities are an obligation that may possibly comes from the occurrence or non-occurrence of fixed future events. O said events, the company has on control itself.
  2. It is an obligation may come for company from past events. It is not same as outflow of funds will need to release the Contingent liabilities.
Stockholders' Equity

It is the total amount of capital provided to a company by its shareholders in exchange for stocks, plus any retained earning or donated capital. We can also define the Stockholders' Equity as it is total amount of assets that investors will own once liabilities and debts are paid off.
As stakeholder and shareholders are synonymous, hence stockholder’s equity may also be concerned to as shareholders’ equity.

To calculate the stockholder’s equity, below is the two calculations:

Stockholder’s equity = share capital + retained earnings – treasury shares

Stockholder’s equity = total assets – total liabilities

Components of Stockholder’s Equity

It influenced by various components are explained below:

Retained Earnings: - It is amounts earned by income, called as retained earnings.

Share capitals: - The amounts received through the reporting entity from transaction with its owner are called as Share capitals.

Net Income & Dividends: - The Net Income increases retained earnings while dividend payment decrease retained earnings.

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