The 5 Basic accounting rules group all finance related things into 5 fundamental types of “accounts”. That is, everything that accounting deals with can be placed into one of these 5 accounts
Haven defined the 5 basic accounts, lets look at the relationship between them. How does one type of account affect the others? Firstly, equity is defined by assets and liability. That is, your net worth is calculated by subtracting your liabilities from your assets:
Assets – Liabilities = Equity
Furthermore, you can increase your equity through income, and decrease equity through expenses. This makes sense of course, when you receive a pay cheque you become “richer” and when you pay for dinner you become “poorer”. This is expressed mathematically in what is known as the Accounting Equation:
Assets – Liabilities = Equity + (Income – Expenses)
This equation must always be balanced, a condition that can only be satisfied if you enter values to multiple accounts. For example: if you receive money in the form of income you must see an equal increase in your assets. As another example, you could have an increase in assets if you have a parallel increase in liabilities.
A typical day in the life of an Accountant
The basic accounts relationships
A graphical view of the relationship between the 5 basic accounts. Net worth (equity) increases through income and decreases through expenses.
At L & S Accounting Firm, our accounting services produces
For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a management discussion and analysis:
For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.