Principles of Accounting
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In essence, accounting basics terms enable an individual to feel comfortable to navigate through the accounting software. With no doubt; small auto body shop requires an equipped individual with accounting basics, so that money flows smoothly. It is a well-documented fact; there are numerous basic accounting names that include expenses, revenues, assets, statement of the cash flow, balance sheet, liabilities and income statement. In facts, being familiar with these terms will enable one to record transactions to the debits and credits side. In this context, an expense is the outflow of the money used to pay a service or an item for instance rent. Revenues refer to the amount brought in the company through business activities, while assets are resources owned by the company to generate cash flow or to benefit the organization operation. In conjunction with this, the cash flow statement is the financial statement that concerns the flow of cash out and in the business. Cash flow statement is fundamental in determining the short-term viability of the company for instance, when paying bills. Balance sheet is the financial statement, which summarizes the firm liabilities, assets and shareholders equity as well as outlining what the company owns. With this regard, the balance sheet should follow the formula of liabilities plus shareholders equity equal to assets. Liabilities are debts that a company owes to businesses and people while income statement is the company financial statement that measures the company financial performance for a specific accounting period. It is assessed by analyzing how businesses incur expenses and revenues through operating as well as, non-operating activities.
Rules of debits and credits
The rules of credits and debits are the backbone of accounting system. It is a well-documented fact; in every ledger accounting entry, it has tow sides; credit and debit side. As part of the rule, all debits should equal all credits, and failure to this leads to out-of-balance. With this in mind, the accounting system has a mechanism that ensures balance of all entries. It is borne in mind; an increase in one account may lead to decrease or equal to the other. For instance, an increase in assets or expenses leads to an increase in debit and a decrease in credit, while a decrease in liabilities or incomes leads to a decrease in debit and an increase in credit. These are rules that keep the entry of balance. Quintessentially, credit always goes on the right, while debits always go on the left of the balance sheet. With no doubt; through summing up the debits and credits enables an individual to correct many bookkeeping errors.
Examples of a journal entry would impact the balance sheet
If for instance, a firm has a car worth $2.5Million with no doubt, the car will keep on deprecating over the period used. In such a case, the company may end up selling at $1.8 Million in the next three years thus depreciating with $600,000 and 28 %. When compiling the financial report, the company would incur a loss of 28 %. Secondly, if a company has $30,000 debtors and $5,000 of the debtors’ remains unpaid with no doubt, it would affect the company. In such a case, if the company decides to pay the bad debts with their resources then; there would be a 17 % provision of bad debts. Thirdly, if a company that owes the suppliers $10,000, and in the process pays its suppliers 5,000 there would be 5,000 balance thus, depreciation of 50 % creditors. In conclusion, if the company stocks worth $100,000 and in three years the company stock increase to $120,000 there would an increase of $20,000 thus an appreciation of 20 %.
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