Chapter III
BASIC ACCOUNTING FEATURE
Basic financial reports such as income statements, balance sheets, charts of accounts, and
others help business owners, shareholders, investors, and creditors see clear financial gains or
losses. These reports also assist CEOs and financial officers with determining where to cut back
on expenditures and which budgets to increase.
CHART OF ACCOUNTS
The chart of accounts is a listing of all accounts used in the general ledger of an
organization. The chart is used by the accounting software to aggregate information into an
entity's financial statements. The chart is usually sorted in order by account number, to ease
the task of locating specific accounts. The accounts are usually numeric, but can also be
alphabetic or alphanumeric.
Accounts are usually listed in order of their appearance in the financial statements,
starting with the balance sheet and continuing with the income statement. Thus, the chart of
accounts begins with cash, proceeds through liabilities and shareholders' equity, and then
continues with accounts for revenues and then expenses. Many organizations structure their
chart of accounts so that expense information is separately compiled by department; thus,
the sales department, engineering department, and accounting department all have the same
set of expense accounts. The exact configuration of the chart of accounts will be based on
the needs of the individual business.
CODE SCHEMES
The first type of numbering to determine for a chart of accounts involves their
structure. This is the layout of an account number, and involves the following components:
Division code - This is typically a two-digit code that identifies a specific company
division within a multi-division company. It is not used by a single-entity company. The
code can be expanded to three digits if there are more than 99 subsidiaries.
Department code - This is usually a two-digit code that identifies a specific
department within a company, such as the accounting, engineering, or production
departments.
Account code - This is usually a three digit code that describes the account itself,
such as fixed assets, revenue, or supplies expense.
Once the coding structure is set, the numbering of accounts can take place. This is
the three-digit coding referred to previously. A company can use any numbering system that
it wants; there is no mandated approach. However, a common coding scheme is as follows:
Assets - Account codes 100-199
Liabilities - 200-299
Equity accounts - 300-399
Revenues - 400-499
Expenses - 500-599
ACCOUNTING DESCRIPTION
Accounting Equation - The Accounting Equation is Assets = Liabilities + Equity. With
accurate financial records, the equation balances.
Accounting - Accounting keeps track of the financial records of a business. In addition to
recording financial transactions, it involves reporting, analyzing and summarizing information.
Accounts Payable - Accounts Payable are liabilities of a business and represent money
owed to others.
Accounts Receivable - Assets of a business and represent money owed to a business by
others.
Asset - Items of value that are owned.
Balance Sheet - Provides a snapshot of a business' assets, liabilities, and equity on a
given date.
Cash Flow - The difference in money flowing in and out. A negative flow indicates more
money going out than coming in. A positive flow shows more money coming in than going out.
Equity - Represents the value of company ownership.
Fixed Asset - Used for a long period of time, e.g. - equipment or buildings.
Inventory - Inventory consists of raw materials, work in progress, and finished goods.
Liability - Liabilities are the obligations of an entity, usually financial in nature.
Loan - A monetary advance from a lender to a borrower.
Net Income - Net Income equals revenue minus expenses, taxes, depreciation and
interest.
Non-Cash Expense - Does not require cash outlay, e.g. - depreciation.
Non-operating Income - Income not generated from the business. An example might be
the sale of unused equipment.
Note - A Note is a document promising to repay a debt.
Operating Income - Determined by subtracting operating expenses from operating
revenue. Interest and income tax expenses are not included.
Other Income - Non-recurring income, e.g. - interest.
Profit - Profit is revenue minus expenses. Reductions for taxes, interest, and depreciation
are included.
Retained Earnings - Money left after all the bills have been paid and all the shareholder
dividends have been distributed; often reinvested in the business.
Revenue - The actual amount of money a company brings in during a particular time
period; gross income.
Supplies - Consumable materials used in business and replenished as needed. Supplies
are not inventory for sale; rather they are used to carry out business activities.
SAMPLE OF FINANCIAL REPORTS
VILLAR PHOTOSHOP
Statement of Comprehensive Income
For the Year ended December 31, 20xx
REVENUES
Printing Services XX
XX
EXPENSES
Salaries and Wages XX
Internet and Communication XX
Water and Power XX
Rental XX
Computer Supplies XX
Taxes and Licenses XX
XX
INCOME BEFORE TAX
Income Tax Expense XX
XX
NET INCOME
XX