Simple Accounting
by
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Chapter 3
Fundamental Accounting Principles
Business Organizations
| There are generally three types of business organizations: |
- Proprietorship
- Partnerships
- Corporations
| Proprietorship |
When he files his income tax return at the end of the year, he will report the income and expenses of his coffee shop on a separate form and include it together with his own taxes to determine how much tax he is liable for.
| Partnerships |
| Corporations |
The advantages of the corporation obviously are that it has limited liability. It is also an organization that can issue shares of stock or bonds in order to finance its needs. Investors who purchase these shares of stock are actually the owners of the corporation. This allows the corporation to have many owners and raise a substantial amount of capital in the process. A corporation is run by a Board of Directors appointed by the owners. The board manages the affairs of the corporation and they work to the best interest of the investors who own the company.
| The Accounting Equation |
A = L + OE
This is an important equation that you will need to keep in the back of your mind as you study accounting and as you work in the field. It simply says that the amount that a company owes, added to the owner's equity in the company equals the total Assets that the company has.
| Assets |
Non-current assets include assets like equipment (trucks, buildings, machinery...) that have a lifespan of 12 months or more. These assets normally stay on the books longer and are depreciated over their useful lives. We will talk more about depreciation as we go along. For the time being it is simply a way of recovering the cost of the asset over time. If a construction company owns a truck that it uses in the business for the production of income, it is allowed to recover the loss in value of that truck to compensate for the revenue that the asset produces. This is known as depreciation expense.
Liabilities Liabilities are obligations that a company has. Like assets, they can be classified as current and non-current. Accounts payable (A/P) represents money that a company owes its vendors. When a company purchases raw food to be processed and then sold again to customers, the vendors who sell the raw food are entitled to collect money for their merchandise. A/P like A/R is classified as current because it is expected to be settled in less than one year. When an employee works for a company and they are owed money, another current liability is created know as payroll payable.
Owner's Equity When you take all the assets of a company and subtract from it all the liabilities, what you have left is the net worth or equity of the owner. You can think of it also on a personal level. An individual has a house, a car, jewelry, furniture and maybe a boat. These are his or her assets. However, the house may carry a mortgage (liability). The car may have a note on which they make monthly payments (liability). Adding up the value of the entire individual's assets and reducing them by the amounts they owe on them, you are left with the net worth – that
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About the Book
Introduction
Financial accounting has always been a very interesting field of study. It has also been a challenging area because the material is not always easy to grasp the first time around. It is imperative that as you study accounting, you get a bigger and bigger picture of the whole accounting cycle. You are going to learn that accounting has to do with gathering, sorting, recording and posting financial information in order to produce the ultimate end product: The Financial Statements. Users of the financial statements include management in a company, government authorities, creditors and investors. The financial statements tell us the results of operations and the financial position of a company at a given point in time. Investors use audited financial statements in order to make decisions as to whether or not to invest their hard-earned money in a company.
You, as an accountant, therefore will play a very important role. You will either be involved with processing the raw data that is needed to prepare the financial information that will be used by the general public, or you will be one who will analyze the finish product in order to render an opinion as to the fairness of the information. These individuals are referred to as Auditors. An auditor is still an accountant, however he goes beyond preparing the financial information: he reviews them and decides whether or not they are produced in conformity with certain government regulations that we will talk about in this book. These auditors frequently bear the title of Certified Public Accountant (CPA). You can be an accountant and not be an auditor. However, you cannot be an auditor without first having been an accountant.
As long as you can keep in the back of your mind that the ultimate objective of accounting is to produce financial information that will be used by the general public, you will be on the right track and the material will not be so difficult to understand. As you do this, you will also begin to have a global view of the entire accounting cycle in your mind so that you will know where you are every step of the way.
In this book we will look at a lot of the basic concepts of accounting. These are the groundwork of the whole accounting profession. You will need to get a solid understanding of these principles before you go to any intermediate or advance courses. This is where you will have the most fun. The material is not too difficult. I have taken steps to simplify these principles so that you not only learn, but also enjoy it.
About the Author
Dantes Joseph Jr. is an accountant who graduated with a bachelor's degree from Jersey City State College in May of 1987. He also holds an associate's degree from Rockland County Community college. He worked as an auditor, controller and senior/staff accountant for 14 years for various companies including Touche Ross – a former big eight accounting firm. Accounting is his favorite subject. He carried a 4.0 grade point average (GPA) in it through his advance accounting courses in school. He was inspired to write this book when he almost accidentally began to teach Introduction To Accounting on the Internet. The response to the class was very high. He then realized that at the age of 40, it's more rewarding to share his knowledge and expertise with others who are either getting started in the accounting field or are struggling with it. Being conscious of the difficulties that new students to accounting will face, he decided to use his own experience to simplify the fundamental accounting principles that college students will have to face. His main goal is to use the same material that is taught in college and simplify it through examples, shortcuts, spreadsheets and flowcharts so students may understand the material more easily.
Mr. Joseph is also an active real estate investor. He owns a few investments properties. He is also the owner and president of DJ Accounting & Tax Services: a practice that specializes in performing computerized accounting, bookkeeping and tax in Miami Florida.