Assets:

Any item of economic value owned by an individual or

corporation, especially that which could be converted
to cash.
Examples:
cash, securities, accounts receivable, inventory, office
equipment, real estate, a car, and other property. On a balance
sheet, assets are equal to the sum of liabilities, common stock,
preferred stock, and retained earnings
Assets are divided into the following categories:
current assets (cash and other liquid items), long-term assets (real
estate,
plant, equipment), prepaid and deferred assets (expenditures for
future costs such as insurance, rent, interest), and intangible assets
(trademarks, patents, copyrights, goodwill).
Accounting
“Accounting is an art of recording classifying summarizing in
significant manner transaction of an event at least in the part of
financial character and interpreting the result thereof.” The
systematic recording, reporting, and analysis of financial
transactions of a business.. Accounting allows a company to analyze
the financial performance of the business, and look at statistics such
as net profit.

Accounting Concept And Conventions

In drawing up accounting statements, whether they are external

"financial accounts" or internally-focused "management accounts", a
clear objective has to be that the accounts fairly reflect the true
"substance" of the business and the results of its operation.

The theory of accounting has, therefore, developed the concept of a

"true and fair view". The true and fair view is applied in ensuring
and assessing whether accounts do indeed portray accurately the
business' activities.
To support the application of the "true and fair view", accounting has adopted
certain concepts and conventions which help to ensure that accounting
information is presented accurately and consistently.

Accounting Conventions
The most commonly encountered convention is the "historical cost
convention". This requires transactions to be recorded at the price ruling at the
time, and for assets to be valued at their original cost.

Under the "historical cost convention", therefore, no account is taken of

changing prices in the economy.

The other conventions you will encounter in a set of accounts can be

summarised as follows:

Monetary Accountants do not account for items unless they can be

measurement quantified in monetary terms. Items that are not accounted for
(unless someone is prepared to pay something for them) include
things like workforce skill, morale, market leadership, brand
recognition, quality of management etc.
Separate This convention seeks to ensure that private transactions and
Entity matters relating to the owners of a business are segregated
from transactions that relate to the business.
Realisation With this convention, accounts recognise transactions (and any
profits arising from them) at the point of sale or transfer of
legal ownership - rather than just when cash actually changes
hands. For example, a company that makes a sale to a customer
can recognise that sale when the transaction is legal - at the
point of contract. The actual payment due from the customer
may not arise until several weeks (or months) later - if the
customer has been granted some credit terms.
Materiality An important convention. As we can see from the application of
accounting standards and accounting policies, the preparation
of accounts involves a high degree of judgement. Where
decisions are required about the appropriateness of a particular
accounting judgement, the "materiality" convention suggests
that this should only be an issue if the judgement is "significant"
or "material" to a user of the accounts. The concept of
"materiality" is an important issue for auditors of financial
accounts.
Accounting Concepts

Four important accounting concepts underpin the preparation of any set of

accounts:
Going Accountants assume, unless there is evidence to the contrary,
Concern that a company is not going broke. This has important
implications for the valuation of assets and liabilities.
Consistency Transactions and valuation methods are treated the same way
from year to year, or period to period. Users of accounts can,
therefore, make more meaningful comparisons of financial
performance from year to year. Where accounting policies are
changed, companies are required to disclose this fact and
explain the impact of any change.
Prudence Profits are not recognised until a sale has been completed. In
addition, a cautious view is taken for future problems and costs
of the business (the are "provided for" in the accounts" as soon as
their is a reasonable chance that such costs will be incurred in
the future.
Matching (or Income should be properly "matched" with the expenses of a
"Accruals") given accounting period.
Key Characteristics of Accounting Information

There is general agreement that, before it can be regarded as useful in

satisfying the needs of various user groups, accounting information should
satisfy the following criteria:

What it means for the preparation of accounting

Criteria
information
Understandability This implies the expression, with clarity, of accounting
information in such a way that it will be understandable to
users - who are generally assumed to have a reasonable
knowledge of business and economic activities
Relevance This implies that, to be useful, accounting information must
assist a user to form, confirm or maybe revise a view -
usually in the context of making a decision (e.g. should I
invest, should I lend money to this business? Should I work
for this business?)
Consistency This implies consistent treatment of similar items and
application of accounting policies
Comparability This implies the ability for users to be able to compare
similar companies in the same industry group and to make
comparisons of performance over time. Much of the work
that goes into setting accounting standards is based around
the need for comparability.
Reliability This implies that the accounting information that is
presented is truthful, accurate, complete (nothing
significant missed out) and capable of being verified (e.g.
by a potential investor).
Objectivity This implies that accounting information is prepared and
reported in a "neutral" way. In other words, it is not biased
towards a particular user group or vested interest

Basic Accounting Concepts

As we saw in the previous chapter, accounting is based on 5 basic account
types: Assets, Liabilities, Equity, Income and Expenses. We will now
expand on our understanding of these account types, and show how they are
represented in GnuCash. But first, let's divide them into 2 groups, the balance
sheet accounts and the income and expense accounts.

3.1.1. Balance Sheet Accounts

The three so-called Balance Sheet Accounts are Assets, Liabilities, and
Equity. Balance Sheet Accounts are used to track the changes in value of
things you own or owe.

Assets is the group of things that you own. Your assets could include a car,
cash, a house, stocks, or anything else that has convertible value. Convertible
value means that theoretically you could sell the item for cash.

Liabilities is the group of things on which you owe money. Your liabilities
could include a car loan, a student loan, a mortgage, your investment margin
account, or anything else which you must pay back at some time.

Equity is the same as "net worth." It represents what is left over after you
subtract your liabilities from your assets. It can be thought of as the portion
of your assets that you own outright, without any debt.

3.1.2. Income and Expense Accounts

The two Income and Expense Accounts are used to increase or decrease the
value of your accounts. Thus, while the balance sheet accounts simply track
the value of the things you own or owe, income and expense accounts allow
you to change the value of these accounts.

Income is the payment you receive for your time, services you provide, or
the use of your money. When you receive a paycheck, for example, that
check is a payment for labor you provided to an employer. Other examples of
income include commissions, tips, dividend income from stocks, and interest
income from bank accounts. Income will always increase the value of your
Assets and thus your Equity.

Expenses refer to money you spend to purchase goods or services provided

by someone else. Examples of expenses are a meal at a restaurant, rent,
groceries, gas for your car, or tickets to see a play. Expenses will always
decrease your Equity. If you pay for the expense immediately, you will
decrease your Assets, whereas if you pay for the expense on credit you
increase your Liabilities.

GnuCash Accounts
This section will show how the GnuCash definition of an account fits into the
view of the 5 basic accounting types.

But first, let's begin with a definition of an account in GnuCash. A GnuCash

account is an entity which contains other sub-accounts, or that contains
transactions. Since an account can contain other accounts, you often see
account trees in GnuCash, in which logically associated accounts reside
within a common parent account.

A GnuCash account must have a unique name (that you assign) and one of
the predefined GnuCash "account types". There are a total of 13 account
types in GnuCash. These 13 account types are based on the 5 basic
accounting types, the reason there are more GnuCash account types than
basic accounting types is that this allows GnuCash to perform specialized
tracking and handling of certain accounts. There are 7 asset accounts (Cash,
Bank, Stock, Mutual Fund, Currency, Accounts Receivable, and Asset ),
3 liability accounts (Credit Card, Accounts Payable, and Liability, ), 1
equity account (Equity), 1 income account (Income), and 1 expense account
(Expense).

These GnuCash account types are presented in more detail below.

3.2.1. Balance Sheet Accounts

The first balance sheet account we will examine is Assets, which, as you
remember from the previous section, refers to things you own.
To help you organize your asset accounts and to simplify transaction entry,
GnuCash supports several types of asset accounts:

1. Cash Use this account to track the money you have on hand, in your
wallet, in your piggy bank, under your mattress, or wherever you
choose to keep it handy. This is the most liquid, or easily traded, type
of asset.
2. Bank This account is used to track your cash balance that you keep in
institutions such as banks, credit unions, savings and loan, or
brokerage firms - wherever someone else safeguards your money. This
is the second most liquid type of account, because you can easily
convert it to cash on hand.
3. Stock Track your individual stocks and bonds using this type of
account. The stock account's register provides extra columns for
entering number of shares and price of your investment. With these
types of assets, you may not be able to easily convert them to cash
unless you can find a buyer, and you are not guaranteed to get the same
amount of cash you paid for them.
4. Mutual Fund This is similar to the stock account, except that it is used
to track funds. Its account register provides the same extra columns for
entering share and price information. Funds represent ownership shares
of a variety of investments, and like stocks they do not offer any
guaranteed cash value.
5. Currency If you trade other currencies as investments, you can use
this type of account to keep track of them. The register is similar to the
stock register, except that you enter exchange rates instead of prices.
6. Accounts Receivable (A/Receivable) This is typically a business use
only account in which you place outstanding debts owed to you. It is
considered an asset because you should be able to count in these funds
arriving.
7. Asset For personal finances, use this type of account to track "big-
ticket" item purchases that significantly impact your net worth.
Generally, you can think of these as things you insure, such as a house,
vehicles, jewelry, and other expensive belongings.

The second balance sheet account is Liabilities, which as you recall, refers to
what you owe, money you have borrowed and are obligated to pay back some
day. These represent the rights of your lenders to obtain repayment from you.
Tracking the liability balances lets you know how much debt you have at a
given point in time.
GnuCash offers three liability account types:

1. Credit Card Use this to track your credit card receipts and reconcile
your credit card statements. Credit cards represent a short-term loan
that you are obligated to repay to the credit card company. This type of
account can also be used for other short-term loans such as a line of
credit from your bank.
2. Accounts Payable (A/Payable) This is typically a business use only
account in which you place bills you have yet to pay.
3. Liability Use this type of account for all other loans, generally larger
long-term loans such as a mortgage or vehicle loan. This account can
help you keep track of how much you owe and how much you have
already repaid.

The final balance sheet account is Equity, which is synonymous with "net
worth". It represents what is left over after you subtract your liabilities from
your assets, so it is the portion of your assets that you own outright, without
any debt. In GnuCash, use this type of account as the source of your opening
bank balances, because these balances represent your beginning net worth.

There is only a single GnuCash equity account, called naturally enough,

Equity.

introduction to accounting

Introduction

It is not easy to provide a concise definition of accounting since the word has a
broad application within businesses and applications.

The American Accounting Association define accounting as follows:

"the process of identifying, measuring and communicating economic

information to permit informed judgements and decisions by users of the
information!.

This definition is a good place to start. Let's look at the key words in the above
definition:

- It suggests that accounting is about providing information to others.

Accounting information is economic information - it relates to the financial or
economic activities of the business or organisation.
- Accounting information needs to be identified and measured. This is done by
way of a "set of accounts", based on a system of accounting known as double-
entry bookkeeping. The accounting system identifies and records "accounting
transactions".

- The "measurement" of accounting information is not a straight-forward

process. it involves making judgements about the value of assets owned by a
business or liabilities owed by a business. it is also about accurately measuring
how much profit or loss has been made by a business in a particular period. As
we will see, the measurement of accounting information often requires
subjective judgement to come to a conclusion

- The definition identifies the need for accounting information to be

communicated. The way in which this communication is achieved may vary.
There are several forms of accounting communication (e.g. annual report and
accounts, management accounting reports) each of which serve a slightly
different purpose. The communication need is about understanding who needs
the accounting information, and what they need to know!

Accounting information is communicated using "financial statements"

What is the purpose of financial statements?

There are two main purposes of financial statements:

(1) To report on the financial position of an entity (e.g. a business, an

organisation);

(2) To show how the entity has performed (financially) over a particularly period
of time (an "accounting period").

The most common measurement of "performance" is profit.

It is important to understand that financial statements can be historical or

relate to the future.

Accountability

Accounting is about ACCOUNTABILTY

Most organisations are externally accountable in some way for their actions and
activities. They will produce reports on their activities that will reflect their
objectives and the people to whom they are accountable.

The table below provides examples of different types of organisations and how
accountability is linked to their differing organisational objectives:
Organisation Objectives Accountable to (examples)
Private or public - Making of profit - Shareholders
company - Creation of wealth - Other stakeholders (e.g.
(e.g. BP, Tesco) employees, customers,
suppliers)
Charities - Achievement of charitable - Charity commissioners
(e.g. Save the aims - Donors
Children) - Maximise spending on
activities
Local Authorities - Provision of local services - Local electorate
(e.g. Leeds City - Optimal allocation of - Government departments
Council) spending budget
Public services (e.g. - Provision of public service - Government ministers
transport, health) (often required by law) - Consumers
(e.g. National Health - High quality and reliability
Service, Prison of services
Service)
Quasi-governmental - Regulation or instigation - Government ministers
agencies of some public action - Consumers
(e.g. Data Protection - Coordination of public
Registrar, Scottish sector investments
Arts Council)
All of the above organizations have a significant roles to play in society and
have multiple stakeholders to whom they are accountable.

All require systems of financial management to enable them to produce

accounting information.

How accounting information helps businesses be accountable

As we have said in our introductory definition, accounting is essentially an

"information process" that serves several purposes:

- Providing a record of assets owned, amounts owed to others and monies

invested;

- Providing reports showing the financial position of an organisation and the

profitability of its operations

- Helps management actually manage the organisation

- Provides a way of measuring an organisation's effectiveness (and that of its

separate parts and management)
- Helps stakeholders monitor an organisations activities and performance

- Enables potential investors or funders to evaluate an organisation and make

decisions

There are many potential users of accounting Information, including

shareholders, lenders, customers, suppliers, government departments (e.g.
Inland Revenue), employees and their organisations, and society at large.
Anyone with an interest in the performance and activities of an organisation is
traditionally called a stakeholder.

For a business or organisation to communicate its results and position to

stakeholders, it needs a language that is understood by all in common. Hence,
accounting has come to be known as the "language of business"

There are two broad types of accounting information:

(1) Financial Accounts: geared toward external users of accounting information

(2) Management Accounts: aimed more at internal users of accounting
information

Although there is a difference in the type of information presented in financial

and management accounts, the underlying objective is the same - to satisfy the
information needs of the user. These needs can be described in terms of the
following overall information objectives:

Collection in money terms of information relating to

Collection
transactions that have resulted from business operations
Recording and Recording and classifying data into a permanent and logical
Classifying form. This is usually referred to as "Book-keeping"
Summarising data to produce statements and reports that
Summarising will be useful to the various users of accounting
information - both external and internal
Interpreting and Interpreting and communicating the performance of the
Communicating business to the management and its owners
Forecasting and planning for future operation of the
Forecasting and business by providing management with evaluations of the
Planning viability of proposed operations. The key forecasting and
planning tool is the "Budget"
The process by which accounting information is collected, reported, interpreted
and actioned is called "Financial Management". Taking a commercial business
as the most common organisational structure, the key objectives of financial
management would be to:
(1) Create wealth for the business
(2) Generate cash, and
(3) Provide an adequate return on investment bearing in mind the risks that the
business is taking and the resources invested

In preparing accounting information, care should be taken to ensure that the

information presents an accurate and true view of the business performance and
position. To impose some order on what is a subjective task, accounting has
adopted certain conventions and concepts which should be applied in preparing
accounts.

For financial accounts, the regulation or control of what kind of information is

prepared and presented goes much further. UK and international companies are
required to comply with a wide range of Accounting Standards which define the
way in which business transactions are disclosed and reported. These are
applied by businesses through their Accounting Policies.

The main financial accounting statements

The purpose of financial accounting statements is mainly to show the financial

position of a business at a particular point in time and to show how that
business has performed over a specific period.

The three main financial accounting statements that help achieve this aim are:

(1) The profit and loss account for the reporting period

(2) A balance sheet for the business at the end of the reporting period

(3) A cash flow statement for the reporting period

A balance sheet shows at a particular point in time what resources are owned by
a business ("assets") and what it owes to other parties ("liabilities"). It also
shows how much has been invested in the business and what the sources of that
investment finance were.

It is often helpful to think of a balance sheet as a "snap-shot" of the business - a

picture of the financial position of the business at a specific point. Whilst this is
a useful picture to have, every time an accounting transaction takes place, the
"snap-shot" picture will have changed.

By contrast, the profit and loss account provides a perspective on a longer time-
period. If the balance sheet is a "digital snap-shot" of the business, then think of
the profit and loss account as the "DVD" of the business' activities. The story of
what financial transactions took place in a particular period - and (most
importantly) what the overall result of those transactions was.
Not surprisingly, the profit and loss account measures "profit".

What is profit?

Profit is the amount by which sales revenue (also known as "turnover" or

"income") exceeds "expenses" (or "costs") for the period being measured.

Basic Concepts
A transaction in a double entry accounting system such as GnuCash is an
exchange between at least 2 accounts. Thus, a single transaction must always
consist of at least two parts, a "from" and a "to" account. The "from" account
is passing value to the "to" account. Accountants call these parts of a
transaction Ledger Entries. In GnuCash, they are called Splits.

For example, you receive a paycheck and deposit it into your savings account
at the bank. The transaction that occurs is that your bank savings account
(an asset) received money from your income account. Two accounts are
affected, and in this case there is a net increase in your equity.

Working with transactions in GnuCash is performed using what is known as

the account register. Every account you create has an account register. It
will appear familiar to you as it looks very similar to the log used to track
checkbooks.

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The accounting equation is Assets = Liabilities + Owner’s Equity. This is the

same format used in a sole proprietorship’s balance sheet. (A corporation’s
balance sheet will use Stockholders’ Equity instead of Owner’s Equity.)
The accounting equation will always remain in balance if double-entry accounting
is followed accurately. For example, if a company borrows $10,000 from its bank,
Assets increase by $10,000 and Liabilities increase by $10,000. When a
company buys inventory with cash, one Asset (Inventory) increases and one
Asset (Cash) decreases. If the owner invests $5,000 of personal assets in the
business, the company’s Assets increase and Owner’s Equity increases. If the
owner withdraws $2,000 from the business for her personal use, the company’s
Assets decrease and Owner’s Equity decreases.
Revenues causes Owner’s Equity to increase, and expenses cause Owner’s
Equity to decrease. If the company earns $1,500 in service fees, the company’s
Assets (Cash or Accounts Receivable) will increase and Owner’s Equity will
increase. When the company incurs electricity charges, the company’s Liabilities
increase and Owner’s Equity decreases. If the company pays for ads to appear in
this week’s newspaper, Assets decrease and Owner’s Equity decreases.
Bookkeepers and accountants will be entering amounts into two or more accounts
for every transaction. This occurs with business accounting software as well, but
the software might be doing part of the entries behind the scenes.
Learn more about the Accounting Equation.