Intro and Fundamentals
Episode #1 of the course Introduction to accounting by Martin Ryan
Hi, I’m Martin. I’ve worked in the finance and IT industries for around 15 years after studying accounting and computers in college. I have not been a pure accountant, but I have found my accounting knowledge to be extremely useful in all my roles, and I think it’s a really practical topic to have a basic understanding of, because it affects every single business.
This course explains accounting fundamentals such as defining assets, liabilities, and other types of accounts; the profit and loss statement; the balance sheet; and the basics of double-entry bookkeeping.
The accounting rules used in Australia, Canada, Great Britain, New Zealand, and the United States are called general accepting accounting principles (GAAP) and are common to all those countries. There are still important tax and legal differences, as well as minor terminology differences like “companies” and “corporations,” but the general concepts apply to any country that uses GAAP.
Today, we’ll cover the building blocks of accounting: the monetary principle and accounts.
The Monetary Principle
When we track things in accounting, they always have a dollar value associated with them for our accounting purposes.
For example, inventory, while not being actual money, is valued in terms of dollars. This puts everything on an even playing field and allows you to compare apples with apples—even if you are talking about pears and oranges. Sure, this is obvious, but it’s still got a fancy name: the monetary principle.
In day-to-day life, when the word “accounts” is used, it usually refers to bank accounts, but in the accounting context, accounts has a much wider meaning. It can mean any area of business we want to track in order to see where money is going to or coming from—in other words, what we spend money on, where money comes in from, whom we owe money to, and who owes money to us.
Examples of accounts are inventory, accounts receivable (people owe you money), bank accounts, advertising expenses, revenue/income, vehicles, accounts payable (you owe money), loans, and equity, just to name a few. Accounts are relevant at home too. A house would fit into an account, as would the mortgage, the gas bill, and salary. Anywhere that money comes in from or gets spent to is an account.
Groups of Accounts
All these accounts will fall into one of six groups. Which one they fit into is important when we come to reporting the account.
Assets: Assets are stores of money or things that can be turned into money reasonably easily, such as things that can be sold. Examples of assets are cash, positive bank accounts, vehicles, TVs, computers, buildings, and accounts receivable.
Expenses: Expenses are things you spend your money on while running your business and trying to earn an income. Examples of expenses are phone, gas, marketing, rent, and electricity. An expense is money paid on something that is used up almost immediately. The money spent on buying assets is not classed as an expense, because there is something valuable that could be sold again.
Drawings: Distributions made to business owners—e.g., when an owner takes money out of their business for themselves—are known as drawings.
Liabilities: This is when a company or person owes money or some other asset to another company or person. Examples of liabilities include loans, mortgages, and accounts payable.
Equity: This is the share in the business that the owners have. When assets outweigh liabilities, the balancing figure is the equity. What this means is that if the business was closed and all assets were sold and all debts settled, whatever is left would be given to the owners. This figure is equity. The idea can also be applied at home. If you sold all your worldly possessions and paid all you owe, then the figure left at the end is your equity. If the figure is negative, then there is not enough assets to cover your liabilities.
Revenue: Any money that comes into the business for services rendered or goods sold is called revenue or income.
Tomorrow, we’ll cover the profit and loss statement, which tracks revenue and expenses.
Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper
Share with friends