Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government or other agencies that may require them.
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:
- Assets — things you own.
- Liabilities — things you owe.
- Equity — overall net worth.
- Income — increases the value of your accounts.
- Expenses — decreases the value of your accounts.
- It is clear that it is possible to categorize your financial world into these 5 groups. For example,
- Asset – The cash in your bank account.
- liability – Your mortgage.
- Income – Your pay cheque.
- Expense – The cost of last night’s dinner .
The Accounting Equation
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.
The basic accounts relationships
|+ VALUE||– VALUE|
A graphical view of the relationship between the 5 basic accounts. Net worth (equity) increases through income and decreases through expenses.
A Day in the Life – Accountant
A typical day in the life of an Accountant
At L & S Accounting Firm, our accounting services produces
- Reports / financial statements
- Notes to the financial statements
- Management accounts / reports / analysis
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:
- Statement of Financial Position: also referred to as a balance sheet, reports on a company’s assets, liabilities, and ownership equity at a given point in time.
- Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a “P&L”), reports on a company’s income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.
- Statement of Changes in Equity: explains the changes of the company’s equity throughout the reporting period
- Statement of cash flows: reports on a company’s cash flow activities, particularly its operating, investing and financing activities.
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.