Accounting Equation

Examples of Accounting Equation in the following topics:

• The Accounting Equation

  • The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
  • A company with $30,000 in liabilities and $10,000 in owners' equity would have $40,000 in assets according to the accounting equation.
  • Looking at the fundamental accounting equation, one can see how the equation stays is balance.
  • Additionally, changes is the accounting equation may occur on the same side of the equation.
  • Likewise, as the company receives payment from its customers, accounts receivable is credited and cash is debited.

• Double-Entry Bookkeeping

  • The rules for formulating accounting entries are known as "Golden Rules of Accounting".
  • The accounting entries are recorded in the "Books of Accounts".
  • They are the Traditional Approach and the Accounting Equation Approach.
  • Following this approach, accounts are classified as real, personal, or nominal accounts.
  • Real accounts are assets.

• Analysis

  • Operating costs that account for possible economies of scale and learning curves.

• Managerial Accounting

  • Management accounting is one of the most interesting and broad-minded applications of the accounting perspective.
  • When looking at traditional financial accounting, managerial accounting differs in a few key ways:
  • Financial accounting is generally historical, while managerial accounting is about forecasting.
  • Financial accounting looks at the company holistically, while financial accounting can zoom in at various levels (i.e. product level, division level, etc.)
  • Lean Accounting: During the days when the Toyota Production System was just becoming celebrated as a leaner process, accountants began to consider the restrictions of traditional accounting methods on lean processes.

• Consumers of Accounting Information

  • Most of a company's stakeholders consume its accounting information in one form or another.
  • Early accounts served mainly to assist the memory of the businessperson, and the audience for the account was the proprietor or record keeper alone.
  • This development resulted in a split of accounting systems for internal (i.e., management accounting) and external (i.e., financial accounting) purposes and, subsequently, also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
  • Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting.
  • The body of rules that governs financial accounting in a given jurisdiction is the Generally Accepted Accounting Principles, or GAAP.

• Usage of Accounting Information

  • This development resulted in the division of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes.
  • Accounting that concentrates on reporting to people inside the business entity is called management accounting.
  • Accounting that provides information to people outside the business entity is called financial accounting.
  • The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
  • Explain the history of accounting and how accounting information is useful

• Tax Accounting

  • Tax accounting couples legal obligations with financial accounting to ensure adherence to current tax laws.
  • Tax accounting is relatively simple to explain, though nuanced in execution.
  • In short, every region has specific tax accounting rules and regulations.
  • Tax accountants act as the bridge between an organization's accounting team and the reporting bodies in the region.
  • This image demonstrates the various responsibilities and perspectives of different forms of accounting (those being tax accounting, managerial accounting and financial accounting).

• Introduction

  • learn to set up a chart of accounts for your organization
  • In this chapter, we will discuss the principles of accounting as well as some of the options you have for designing and installing an accounting system for your business.
  • There are many computer-based accounting systems available now, for relatively low cost, that make it easier for an entrepreneur to use software on a PC or the Internet to run an accounting system.
  • Although it is possible to keep essential accounting records manually, or perhaps on a series of spreadsheets, you will find that it is much easier and more reliable to simply use accounting software from the beginning.
  • You may need the advice of an accounting professional to work with you in setting up your accounting records and helping you select and implement a suitable accounting package.

• Basic types of accounts

  • The six basic types of accounts used in a typical accounting system, according to Wikipedia are:
  • Each type of account is discussed below (adapted from Wikipedia 2009c).In subsequent sections of this chapter we will discuss how they are used in an accounting system.
  • Typically, accounts in a chart of accounts each have an account number.
  • In the same way, an account number in a chart of accounts uniquely identifies an account and is easier to use in a computerized general accounting system.
  • The next step is to decide the breakdown of accounts you need so that you set up an account for the detailed information you need for each account type.

• Government and Nonprofit Accounting

  • Governmental accounting is an umbrella term which refers to the various accounting systems used by various public sector entities.
  • There is an important difference between private sector accounting and governmental accounting.
  • The unique objectives of government accounting do not preclude the use of the double entry accounting system.
  • The accounting of activities for accountability purposes.
  • The governmental accounting system has a different focus for measuring accounting than private sector accounting.