CMA Shubhasish Das - ACCOUNTING BASICS- THINK LIKE AN ACCOUNTANT: A non-accountants guide to accounting, Beginner’s handbook (Accounting for Dummies)

The purpose of this book is to teach you how to think like an accountant. It will help you to:

• Understand the foundations of accounting
  
• Understand the thinking process Accountants follow to record transactions.
  
• Understand how Accountants prepare financial statements
  

What this book is not:

• This book is not a standard college text book. This book builds your thinking process so that you will find college text books easy to understand.
  
• The examples given in this book are conceptual in nature so that youwill able be to grasp the basic concepts. I will build your mindset required for accounting. You need to practice the questions from your standard text book to get more grip on the concepts I discuss here.
  

What I promise:

• I promise you to make comfortable with the thinking process required for accounting so that you can understand advance accounting by yourself.
  

What I hope:

• I hope you will not underestimate the importance of the fundamentals of accounting. You will realize the importance of fundamentals in the advance stages of accounting.
  
• I hope you will be able to complete this mini book within a week and after reading this book you will have firm understanding of fundamentals.
  
• I hope after reading this book, your thick college text books looks less scary to you.
  
• I hope every non-accountant who is curious about accounting will get a good grasp of fundamentals of accounting.
  

The universe is vast and complex. But it is made up of some elementary particles. And there are few basic laws which governs it. By understanding the interaction of these elementary particles and the basic laws of nature we can understand our physical universe.

Welcome to the accounting universe. The elementary particle of this universe is an account. The interaction between accounts gives birth to a vast and complex accounting universe. Thereare certain laws which governs it. These are called accounting principles.

An accountant is a scientist of accounting world. Scientists use scientific method to reach their conclusions. Likewise accountants use accounting methods. So are you ready to explore the accounting universe like an accountant?

I cannot cover the vastness and complexity of the accounting worldwithin these few pages. But I will explain you the structure and laws upon which this universe is built.

This is what accounting does:

1. It records every transaction happening in the business. (ThroughJournal, Leger, and Trial balance. This part is also called book keeping.

2. It identifies the results of these transactions. (Through profit and loss statement/Income statement)

3. It identifies the financial position of your business. (Balance sheet)

4. It lets you know the cash flows through cash flow statement. (Out of the scope of this book)

This is what accounting is all about

1. Recording the transactions through Journal entries

2. Posting the journal entries to ledger accounts

3. Preparing the unadjusted trial balance.

4. Recording the adjustment entries.

4. Preparing adjusted trial balance

5. Closing the income and expenses accounts to profit and loss account

6. Preparing financial statements.

7. Interpreting the financial statements. (Out of scope of this book)

Accountants vocabulary

In order to understand the topics discussed in upcoming chapters you need to acquaint yourself with some of the basic terms of accounting. I will try to avoid accounting Jargon while explaining these terms.

Financial statements: Financial statements are end result of accounting. These includes Income statement, Balance sheet. changes in owners equity and cash flow statement.

Income statement: This is also called profit and loss statement. It contains all the incomes and expenses generated during an accounting period. The purpose of income statement is to identify profit or loss.

Balance sheet: This reflects financial position of a company at any point of time. It contains Assets, liabilities and owners equity.

Assets: Assets are resources controlled by enterprise. These can be further classified as current and non-current assets.

Current assets: Cash and cash equivalents, assets which are expected to be converted into cash within the companies accounting cycle which is usually twelve months. Example of current assets are inventories, accounts receivable, prepaid expanses etc.

Non-Current assets : Any asset other than current asset is a non-current asset.

Example: Building, Goodwill, patent, long term investments

Fixed Assets: Fixed assets are property, plant and equipment which helps to carry out day to day business operations.

Example: Land, building, Machinery

Liability: These are amounts that business owes to lenders of funds.

Example: Accounts payable, debentures, Loans

Current liability: That portion of liability which is expected to be settled within next 12 months from the balance sheet date.

Example: Bank overdraft, Accounts payable, provision for taxation

Non-Current Liability: any liability other than current liability.

Example: Long term loans, debentures

Capital/ Owners equity: This is the amount contributed by owners in the business.

Example: Equity share capital

Income: it is an inflow of economic benefits which results in the increase of owners equity.

Example: income from sale of goods or provision of services, interest income etc.

Operating income: This is the income generated from the main activities of a business such as selling of goods or rendering of services.

Non-operating income: These are the incomes earned form activities other than the main activities of a business.

Examples: interest income, gain on sale of fixed assets.

Revenue: This is the income which business earns by selling goods or providing services.

Cost: Cost is an expenditure which can be either an asset or expense.

Expense: This a cost which is expired, used up or incurred to earn revenue. Expenses decrease Owners equity.

Example: A building used for manufacturing is recorded at its cost as an asset. Depreciation provided for each accounting year is an expense.

Example: Good purchased are recorded as inventory under assets. When the goods sold, inventory is reduced and reported as expense called cost of goods sold.

Example: Insurance paid in advance is $6000 for 6 months. This is an asset. However in each of the coming months this asset is reduced by 1000 and recognized as expense because it is expired.