Basic accounting
Learning the fundamentals of Personal Finance Management
An introduction to basic accounting -what you need to know to manage your finances.
1) What is accounting ?
Accounting is to account for the flow of money:
where did it come from - and where did it go to.
. . . . ======================================= . . .
go to <<-- <<-- <<-- <<-- <<-- <<-- come from
. . . . ======================================= . . .
If we compare it to the flow of water in a pipe it is obvious that all the water flowing in at the one side of the pipe must be equal to the amount of water flowing out on the other side of the pipe. Should this not be the case - then there obviously must be a leak somewhere. The "double entry" systems simply means that account is given of both ends of the pipe.
2) What about Credit and Debit ?
We Credit the place where the money came from
and we Debit the place where the money went to.
The water comes from the credit side of the pipe and flows to the debit side.
. . . . ======================================= . . .
debit <<-- <<-- <<-- <<-- <<-- <<-- credit
. . . . ======================================= . . .
3) What is an Account ?
An account is simply a container used to group all the flows associated with a certain place.
Accounts can be compared to a lot of water reservoirs - with a lot of pipes connecting them. A transaction happens when we open a valve and let water (money) flow between two reservoirs (accounts.) Of course all the reservoirs are standing on a big piece of land called the "General Ledger" - it is the place where all accounts live.
4) Grouping of accounts
If I talk about WE - It is meant to be understood as the business - seperated from the owners & employees.
Reservoirs are grouped according to their colours.
We get containers in five colours only: white, black, blue, green and red.
We get accounts in five types only:
- Equity = Has to do with the white reservoirs we use to keep track of money that the owners invested in the business. (Now of course the business did not earn this money and at one stage or another we must give it money back to the owners.)
- Liabilities = Has to to with the black reservoirs we use to keep track of money that the business might owe to others. (Now of course the business did not earn this money and at one stage or another we must give it money back to the lenders.)
- Assets = Has to to with the blue reservoirs we use to keep track of everything tht we bought - that can be sold again (like equipment, land & buildings, vehicles, stock and money oweable to us.) (Now of course all the assets the business has either were bought with the equity money of the liability money - or in other words - everything we have was either put in by the owners or borrowed.)
- Income = Has to do with the green reservoirs we use to keep track of all the money that we worked for (the business earned it.)
- Expense = Has to do with the red reservoirs that we use to keep track of things we have to pay in order to be able to earn money (like electricity bills, fuel, salaries, banking cost, rent, etc.) (Money spent on expenses is gone forever.)
email: ben@pcsystems.co.za , pdf download: http://parysinfo.co.za/downloads/notes-basic-accounting-long.pdf
