Accounting is the language of business. Accounting is the process of capturing and communicating financial data. The goal of the accounting system is to issue financial statements. Accounting includes five types of accounts: assets, liabilities, equity, revenues, and expenses.
The accounting equation is assets = liabilities + equity. This is shown on the company’s balance sheet. The balance sheet must balance always because of the accounting equation.
Accrual basis of accounting
Accrual basis of accounting records revenue when products and services are delivered to customers. Expenses are recorded when they are incurred. The expenses are matched with the revenues that they produce. This is called the matching principle.
Accrual accounting better shows the performance of the company than the cash basis. Accrual basis net income is less dependent on the timing of cash flows.
An annuity is a series of equal payments. These payments could be either positive or negative. A cash receipt is a positive cash inflow. A cash payment is a negative cash outflow. An example of an annuity is a monthly payment for a car or a house. Another example is an annual dividend received by an investor.
An annuity typically pays either monthly, quarterly, semiannually, or annually.
There are two types of annuities.
- ordinary annuity – payments occur at the end of the period
- annuity due – payments occur at the beginning of the period
Appreciation is an increase in the value of an asset. For example, assume a stock purchase of 100 shares at $20. A year later the stock has a market price of $32. The appreciation is $12 per share or $1,200 total.
There are four categories of assets on the balance sheet: current assets, fixed assets, investments, and intangible assets.
Assets are shown on the accounting equation. The accounting equation is assets = liabilities + equity.