1st Bac - Accounting Process: double-entry

https://www.youtube.com/watch?v=fCbCE1n4IFE&ab_channel=CorporateFinanceInstitute 

Accounting process: double-entry

The accounting of financial transactions of a business is a process that seeks, as a final product, to generate information for decision making and financial control that the entrepreneur requires to keep the business going.

 

Accounting process

The accounting process of the financial transactions of a business are divided in the following stages:

-       Compilation of written documents that support the financial transaction 

-       Transaction log according to time

-       Classification of the transaction according to the accounts involved 

-       Reporting information in the form of statements

Every financial transaction makes an impact in one or more accounts that make part of the financial statements that show the development of the business.

Among the main groups of accounts that make up the financial reports of a business are: 

-       Assets: Refers to the investments the entrepreneur has made in cash or goods needed for the business to function well.

-       Liabilities: It’s all those debts the business must pay to providers, government entities (taxes and social security) and financial institutions (loans).

-       Equity: It makes reference to the resources contributed to the company and that are exclusively of the entrepreneur.

 

Accounting equation as a starting point

To explain the changes that are generated, based on the application of the double entry principle, in the accounts involved in each financial transaction, it is important to remember the structure of the accounting equation.

What the accounting equation says is that the sum of the assets (investments made by the entrepreneur) is equal to the sum of the liabilities (debts contracted by the entrepreneur) and the equity (own resources of the entrepreneur)

Liabilities + Equity = Assets

For example, in a pizza restaurant, to start the entrepreneur had to buy an over which cost $5500. He used $3000 of his savings to buy it and a loan of $2500. This means that the oven $5500 (asset) was paid with saving $3000 from the entrepreneur (equity) and a loan $2500 (liability)

 

Liability + Equity = Asset

Loan + Savings = Oven

$2500 + $3000 = $5500



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