ACCOUNTING BASICS: a Guide to (Almost) Everything

Introduction

This tutorial provides a comprehensive guide to understanding the basics of accounting through the eight steps of the accounting cycle. By following this guide, you will gain a solid foundation in financial accounting concepts such as the accounting equation, debits and credits, double-entry accounting, and the preparation of financial statements.

Step 1: Identify Transactions

• Begin by recognizing the financial transactions that need to be recorded.
• Transactions can include sales, purchases, payments, and receipts.
• Ensure that each transaction has a measurable financial impact on your accounts.

Step 2: Prepare Journal Entries

• Journal entries are the first formal record of transactions.

Each entry should include

• Date of the transaction
• Accounts affected
• Amounts debited and credited
• A brief description of the transaction
• Example of a journal entry:

  Date        Account                Debit      Credit
  YYYY-MM-DD  Cash                   $X
              Sales Revenue                      $X
  

Step 3: Post to General Ledger

• The general ledger is a comprehensive collection of all accounts.
• Post the journal entries to the appropriate accounts in the general ledger.

Understand the types of accounts

• Assets
• Liabilities
• Equity
• Revenue
• Expenses
• Dividends
• Use T-Accounts to visualize and track the debits and credits for each account.

Step 4: Unadjusted Trial Balance

• A trial balance is prepared to check the accuracy of the ledger accounts.
• List all accounts and their balances, ensuring that total debits equal total credits.
• This step helps identify errors before adjustments are made.

Step 5: Post Adjusting Entries

• Adjusting entries are necessary for accrual accounting to ensure revenues and expenses are recorded in the correct period.

Common types of adjustments include

• Prepayments
• Accruals
• Estimates
• Example of an adjusting entry for accrued wages:

  Date        Account                Debit      Credit
  YYYY-MM-DD  Wage Expense           $Y
              Wages Payable                     $Y
  

Step 6: Adjusted Trial Balance

• After posting adjustments, prepare an adjusted trial balance.
• Ensure that total debits still equal total credits, reflecting the most current balances in your accounts.

Step 7: Create Financial Statements

Financial statements summarize the financial performance and position of a business. The three main types are

• Balance Sheet: Shows assets, liabilities, and equity at a specific date.
• Income Statement: Reports revenue and expenses over a period, showing profit or loss.
• Cash Flow Statement: Details cash inflows and outflows over a period.
• These statements are essential for stakeholders, such as investors and creditors, to assess the company’s financial health.

Step 8: Post Closing Entries

• Closing entries are made to transfer temporary account balances to permanent accounts.
• This process resets temporary accounts (like revenues and expenses) for the next accounting period.
• Example of a closing entry for revenue:

  Date        Account                Debit      Credit
  YYYY-MM-DD  Sales Revenue          $X
              Retained Earnings                  $X
  

Conclusion

In this tutorial, we've covered the essential steps of the accounting cycle, from identifying transactions to creating financial statements and closing entries. Understanding these steps is crucial for anyone beginning their journey in accounting. For further learning, consider exploring specific topics in greater detail through additional resources or practice questions.