Nature of Business Operations

Many business are classified in one of these four types which are service, merchandising, manufacturing or financial services. But there are also some business that are a combination of two or more.

Service.A service company provides services to their clients for a fee.

Merchandising. A merchandising company buys goods which are available for sale, they add value to it, then sells them to customers with the added value.

Manufacturing. A manufacturing company buys the materials, converts them into products then sell these products to customers.

Financial services. Financial services companies deal in services related to money.

Debit and Credit

Debit is the left side of the account. It is abbreviated as Dr from the Latin word debere.

Credit is the right side of the account. It is abbreviated as Cr from the Latin word credere.



Assets are increased in debit and decreased in credit.

Liabilities are increased in credit and decreased in debit.

Equity accounts are owner's capital, withdrawals, income and expense.

Owner's capital is increased in credit and decreased in debit.

Withdrawal is increased in debit and decreased in credit. 

Income is increased in credit and decreased in debit.

Expense is increased in debit and decreased in credit.

Accounting Equation

Accounting Equation is the most basic tool in accounting. It is the foundation of the double-entry system. It states that assets should always be equal to liabilities and equity. 

You can also derive from the formula to get the liabilities and equity. 

Account

Account is the basic summary device of accounting. It shows the record of the decrease, increase and the balance of each of the element of the financial statements.

One example of account is the "T account" which is shaped like a letter T.

The debit (abbreviated as Dr) is always on the left side while the credit (abbreviated as Cr) is always on the right  side. 

Business Goals and Activities

Major goals of all business are profitability and liquidity.

Profitability
Profitability is the potential of a business to be successful. It is the ability of a business to earn a financial income or gain.

Liquidity
Liquidity is the availability of cash to settle financial commitments when the are due.

For a business to achieve these goals, they should engage on business activities. The three types of business activities are financing, operating and investing.

Financing Activities
Financing activities involves obtaining resources to start the business and keep it going. These activities include obtaining and repaying loans, and also having investments and withdrawals by the owner.

Operating Activities
Operating activities involves the use of resources to design, produce, distribute and market goods and services. These activities include buying and selling of inventory, rendering services to customers and production.

Investing Activities
Investing activities involve spending capital to acquire other resources to help achieve the entity's objectives. These activities include buying land, building, equipment and other resources needed in operating the business and also selling them when they are no longer needed.

What is Accounting?

American Accounting Association defines accounting as "the process of identifying, measuring and communicating".

Accounting Standards Council defines accounting as "a service activity".

Accounting vs. Bookkeeping

Accounting is considered by some as synonymous with bookkeeping but those two are totally different. Bookkeeping is concerned with systematic recording of transactions. While, accounting is the bigger picture. Accounting is concerned with preparing and interpreting financial reports. Accounting provides information for the management that will be useful for decision making.

Forms of Business

Sole proprietorship, partnership and corporation are the three forms of business. Accounting process is different on each of the form of business.

Sole Proprietorship

This form of business may also be called "single proprietorship" or simply "proprietorship". This form of business is usually a small type of business. It is owned by a single person who usually runs the business. The owner of the business control and owns all the assets and receives all the profits but also absorbs all the losses and responsible for all the liabilities that the business may incur. 

Partnership

This business is owned by two or more persons who bind themselves to contribute money, property or industry to a common fund. Profit is divided among the partners and each of the partner is liable for the liabilities of the partnership (only if it is pure general partnership). 

Corporation

This is a big type of business which is why it is difficult to create, organize and manage. This business is owned by "stockholders". It is created under the law and is a separate legal entity. Stockholders are not liable for the liabilities of the corporation. Stockholders are only liable up to the amount of  his/her investment. Personal belongings of the stockholders can not be used to settle the corporation's debts.