Fundamentals of Accounting for Non-Accountants
Prior to analyzing financial transactions and beginning the process of recording them, the first step in accounting is for companies to adopt a rational approach to maintaining their records. This includes establishing a systematic method for record-keeping, classifying accounts, and storing information. Below are the key fundamentals of accounting that non-accountants should be aware of:
Assets
Assets represent a company’s owned resources and items that can be measured in monetary terms, possessing future economic value. Assets can be categorized as follows:
- Fixed Assets
Fixed assets are properties owned by the company that are utilized in the production process with no intention of resale. These assets are expected to benefit the company for more than one financial year. Fixed assets may include (buildings, machinery, land, and vehicles).
- Current Assets
Current assets are those expected to be sold, utilized, or converted into cash within one financial year. This category includes (cash, accounts receivable, inventory, prepaid expenses, and accrued revenues).
- Intangible Assets
Intangible assets are resources owned by the company that hold financial value and contribute to its activities, yet lack a physical presence. Examples of intangible assets include (patents, goodwill, and copyrights).
Liabilities
Liabilities refer to debts incurred by the company or financial obligations owed to external parties in exchange for goods, services, or loans. They can be categorized into short-term and long-term liabilities, which may include (creditors, loans, accrued expenses, and deferred revenues).
Equity or Shareholder’s Equity
Equity represents the company’s obligations to its owners or the amount the company must return to shareholders after settling all debts and liquidating its assets. Equity is the difference between total assets and total liabilities, calculated using the following accounting equation:
Assets = Liabilities + Equity
Expenses
Expenses encompass all costs incurred by the company to generate revenues, such as (employee salaries, company rent, payments to suppliers, and equipment depreciation).
Revenue
Revenue includes all earnings derived by the company from its business operations, services rendered, or product sales. To determine net income, the following equation is used:
Net Income = Revenue – Expenses
Types of Financial Statements for Non-Accountants
At the end of the financial accounting period, following the completion of all business transactions, the accountant prepares the following financial statements:
- Income Statement
The income statement is prepared to indicate the company’s net profit or loss. It includes the company’s revenues, from which all incurred expenses are deducted.
- Balance Sheet
The balance sheet is prepared to present the company’s financial position for a specific period. It includes details of the company’s assets, liabilities, and equity.
- Cash Flow Statement
The cash flow statement outlines the cash inflows and outflows of the company, detailing cash sources over a particular financial period.
Understanding Accounting
Accounting can be defined as the process of categorizing and recording financial transactions undertaken by businesses. It encompasses the analysis and summarization of all financial activities that occur within a specific timeframe, as well as the preparation of financial reports. These reports enable regulatory bodies and tax authorities to access accurate financial information, reflecting the company’s financial position and cash flow activities.