Introduction to Accounting
Introduction to Accounting
Accounting is the system of recording financial transactions with both numbers and text in the form of financial statements. It provides an essential tool for billing customers, keeping track of assets and liabilities (debts), determining profitability, and tracking the flow of cash. The system is largely self-regulated and designed for the users of financial information, who are referred to as stakeholders: business owners, lenders, employees, managers, customers, and others. Stakeholders utilize financial statements to help make business, lending, and investment decisions.
Accounting has several specialized fields and roles. Private (internal) accounting generally refers to accountants who work within a single business entity. Small business accountants may assume general roles which require preparing the records (bookkeeping) and performing bank reconciliations. Accounting professionals are generally divided into three fields: tax, audit, and advisory. The tax field focuses on federal, state, and local tax filings. Audit roles test the validity of financial statements and internal controls. Advisory services perform general financial consulting. Public accounting firms have several different clients, whereas private accounting refers to working for one specific business entity.
Accounts
There are five different types of accounts: asset, liability, equity, revenue, and expense. Each account type includes sub-accounts to record transaction details. For example, cash assets may include several different cash and savings accounts.
- Asset accounts: Cash and cash equivalents, accounts receivable, inventory, allowance for doubtful accounts (contra account), prepaid expense, investment, property, plant, and equipment, accumulated depreciation (contra account), intangible assets, accumulated amortization (contra account) and others
- Liability accounts: Accounts payable, notes payable, accrued expenses, deferred revenue, long-term bonds payable and others
- Equity accounts: Common stock, additional paid-in capital, retained earnings, treasury stock (contra account) and others
- Expense accounts: Selling, general, and administrative, interest, repairs, depreciation (non-cash), amortization (non-cash) and others