PART 1 – INTRODUCTION TO ACCOUNTING BASICS
Date: March 2014
1.1. History of Accounting
The concept of double-entry book-keeping and the first definition of
accounting go back to 1494, the year when the first printed opus dealing with
accounting was published in Venice, by the Franciscan monk Luca Paciolo.
Luca Paciolo is seen today as the father of Accounting, taking into account the
fact that, in his opinion, accounting is considered to refer to "a set of rules and
principles regarding the double book-keeping of the wealth of a merchant as well as
of his business, small or large, in the order in which they happened". This judgment
has acquired the rank of the fundamental principle of accounting as the principle of
double entry.
1.2. The definition and the role of Accounting
Accounting is defined as the process of identifying, measuring, and
communicating economic information to permit informed judgments and decisions by
the users of the information.
Accounting is the main component of the economic informational system. It
provides real, concrete and complete data about the existence, movement and
transformation of the patrimonial elements as well as of the obtained results.
The role of accounting is, as the law stipulates, "the main tool for knowledge,
administration and control of the obtained results".
1.3. The basics accounting equation
The most important principles of accounting are the double entry. According
to the principle of the double entry, there must be a constant equivalence between
assets, debts and equity.
The basic accounting equation is an expression of the relationship between the
major categories of accounts on the organization's balance sheet.
It states that assets equal liabilities plus shareholders ́ equity.
The equation must always be in balance.
Assets are economic resources owned by a company and money due from individuals
or other businesses. Examples of assets include cash and cash equivalents,
investments, accounts receivable, finished goods, work in progress, raw materials and
supplies, land, buildings, machinery, patents and goodwill.
Liabilities are legal obligations of a company for the future payment of assets or the
future performance of services arising from previous transactions.
Examples of liabilities include accounts payable, wages and salaries payable,
dividends payable, accrued liabilities, income taxes payable, deferred income taxes,
mortgage bonds, debentures and bank loans.
Shareholders ́ equity is the investment by the company's owners plus any profits or
minus any losses that have accumulated in the business. Shareholders ́ equity equals
the residual value of the company's assets that remains after deducting its liabilities.
1.4. Accounting procedures
Specific proceedings of the accounting method are: the balance sheet, the
account and the trial balance.
The balance sheet is the document which gives the account of the economic
situation of an economic entity at any given moment. Balance sheet is an itemized
statement that lists the total assets and the total liabilities of a given business to
portray its net worth at a given moment of time. The amounts shown on a balance
sheet are generally the historic cost of items and not their current values.
mirela.baba@unitbv.ro 2
Basics of Accounting Coordinator: Conf. univ. dr. Baba Mirela
The account is the detailed record of any component of the patrimony - asset,
liability, owners' equity, revenue or expense resulted after economic transactions in an
economic entity. Account is the detailed record of a particular asset, liability, owners'
equity, revenue or expense.
The trial balance checks and controls the accuracy of account records. Trial
balance is a listing of the accounts in your general ledger and their balances as of a
specified date. A trial balance is usually prepared at the end of an accounting period
and is used to see if additional adjustments are required to any of the balances. Since
the basic accounting system relies on double-entry bookkeeping, a trial balance will
have the same total debit amount as it has total credit amounts.
Accounting is divided into two categories, managerial and financial
accounting, based on the parties for whom the information is prepared.
Managerial accounting provides special information for the managers of a
company ranging form broad, long range plans to detailed explanations.
Financial accounting information is prepared for external users such as
stockholders and creditors.
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