Intro

I'm not an Accountant but I play one at work.

Here are some basic definitions of Accounting:

With such definitions, it is not surprising that accounting folks are often linked to computer folks.

Ledgers and the Accounting Equation

The financial worth of a business is all of its assets after any of its debts have been paid off. That is the basic Accounting Equation:

Assets - Liabilities = Equity

The financial transactions that compromise each of the elements of the Accounting Equation (Assets, Liabilities, and Equity) are recorded in Ledgers (aka SubLedgers or Accounts). All of the ledgers added up (Assets + Liabilities + Equity) form the General Ledger (aka GL or G/L). The GL should balance, ie equal to zero if this convention is followed:

The Accounting Equation is often rewritten in this fashion to help remember those conventions:

Assets = Liabilities + Equity

Different ledgers will be used depending on the business. Here are typical names for typical ledgers used:

Assets
(What is )
  Liabilities
(What is owed)
  Equity
(aka Fund Balance,
Owners' Equity,
Net Worth,
Retained Earnings)
  • +Cash
  • +Accounts Receivable
    (aka AR or A/R)
  • +Inventory
    • Raw Materials
    • Works In Progress
    • Finished Goods
EQUALS
  • -Accounts Payable
    (aka AP or A/P)
  • -Deferred Revenue
PLUS
  • -Revenue
    (aka Income)
    • Product A
    • Product B
    • Interest
    • Consulting
  • +Expenses
    • Salaries and Wages
    • Taxes
    • Utilities
    • Shipping
    • Products
    • Maintenance
    • Depreciation*
    • Amortization
    • Interest
    • Repairs
    • Advertising
    • Rent
  • -Beginning Equity
  • -Equity Additions
  • +Equity Deductions
*Depreciation is usually (initial cost ÷ useful life), although accelerating depreciation is also used.

A large accounting system may provide separate sub ledgers for different departments.

EG: The Munster Garage Sale

Time Transaction Cash Revenue GL
1 AM Initialize ledgers. 0 0 0
1-4 AM Several sales. 40 -40 0

EG: The Addams Garage Sale

Time Transaction Cash AR Revenue Beginning Equity GL
1 AM nitialize ledgers. 20 0 0 -20 0
1-4 AM Several sales. 70 0 -50 -20 0
5 AM Sale to Munster who says he'll pay back later. 70 30 -80 -20 0
Next night Munster pays back $30. 100 0 -80 -20 0

EG: Chaplin Sweeper

Time Transaction Cash AR AP Revenue Expenses GL
Monday Initialize ledgers. 0 0 0   0 0
  Chaplin convinces Capone to give him a broom on $10 credit. 0 0 -10 0 10 0
  Chaplin sweeps Warbucks' mansion for $12, but on the condition that he'll pay on Wednesday. 0 12 -10 -12 10 0
Tuesday Capone wants his money, but Chaplin can't pay, so Capone charges $2 more. 0 12 -12 -12 12 0
Wednesday Warbucks pays the $12. 12 0 -12 -12 12 0
  Chaplin pay Capone his $12. 0 0 0 -12 12 0

EG: Sawyer Shoveler

Time Transaction Cash Deferred Revenue Revenue GL
12 PM Initialize ledgers. 0 0 0 0
  Mom gives Sawyer $5 to shovel snow. 5 -5 0 0
12-7 PM Mom nags Sawyer to shovel snow. 5 -5 0 0
7 PM Dad comes home. Sawyer shovels snow. 5 0 -5 0

EG: Acme, Inc. Manufacturer

Time Transaction Cash Raw Materials Inventory Works In Progress Inventory Finished Goods Inventory AR Revenue Shipping Expenses Beginning Equity GL
8:00:00 Initialize ledgers. 400 0 0 0 0 0 0 -400 0
  X1 Bird Feeder Trap ordered by Coyote. 400 0 0 0 0 0 0 -400 0
8:00:01 Raw Materials purchased. 0 400 0 0 0 0 0 -400 0
8:00:02 Begin manufacturing and assembling. 0 0 400 0 0 0 0 -400 0
8:00:03 X1 Bird Feeder Trap finished. 0 0 0 400 0 0 0 -400 0
8:00:04 X1 Bird Feeder Trap shipped to Coyote. 0 0 0 0 800 -300 -100 -400 0
8:00:05 X1 Bird Feeder Trap delivered to Coyote and paid for. 800 0 0 0 0 -300 -100 -400 0

EG: Loony University

Time Transaction Cash Equity Additions Equity Deductions GL
Jan Initialize ledgers. 0 0 0 0
Feb University receives grant. 20,000 -20,000 0 0
Mar University returns grant money. 10,000 -20,000 10,000 0

Balance Sheets and Income Statements

Two of the most important kind of Financial Reports are Financial Statements that fall into two categories:

Balance Sheet

Here is a typical Balance Sheet for a given date:

Of course Assets = Liabilities + Equity

Some typical figures derived from a Balance Sheet:

Income Statement

Here is a typical Income Statement covering a Calendar Year.

Some typical figures derived from an Income Statement:

Page Modified: (Hand noted: ) (Auto noted: )