Basic Financial Accounting for Non-Accountants, Understanding Basic Accounting Concepts for Non-Accountants, Financial Accounting Concepts for Non-Accountants, Accounting for Non-Accountants, Understanding the Basic Financial Statements and Basic Accounts for Non-Accountants are the main areas of concern for this article. Non-Accountants need not to interpret the Financial Statements but to understand them.
Understanding Financial Accounting for Non-Accountants is a great challenge for persons who have no idea of the basic concepts of Financial Accounting and Accounting terms. It will be easier for those who had attended basic accounting courses in college with degrees related to commerce, banking, management, economics and other business related courses. There are also undergraduate courses that include Basic Accounting in their curriculum.
Financial Accounting has always been part of our lives even for Non-Accountants. The mere handling of money involves Financial Accounting especially if it is recorded, classified, analyzed and summarized. Non-Accountants may compute for money spent for expenses incurred and income received in different ways. The mere listing of Expenses and Income is part of Accounting and Non-Accountants have their preferred ways to do that. The only difference with the process of Accountants is their procedures are based upon what is generally accepted.
The basic rule in Financial Accounting is balancing; that is, in every transaction that involves money or financial value, debit and credit go together. Every transaction has debit and credit at the same time; debit for value received and credit for value parted with. For example, if you buy Cash for purchasing Computer, then you have received the Computer in exchange for the Cash as value parted with. Thus, you’ll debit the Computer and credit Cash. If you buy the Computer out of a loan, then, you’ll debit Computer and credit Loans Payable. The entry to repay the loan is Debit Loans Payable and Credit Cash as value parted with.
After understanding the characteristics of each transaction and identifying the accounts for each debit and credit, Non-Accountants should understand the appropriate Classification of Accounts; the appropriate distinction among Assets, Liabilities, Equity, Income and Expenses in Financial Accounting. Assets are owned, tangible or intangible and the value may be used for current and future operations. Liabilities are payables to others over a specified period of time. Equity refers to Capital established by the owners which may be increased through additional put up and net income and may be reduced by Net Loss, withdrawals and dividends for corporation. Income is the earnings and the main purpose of business operations and Expenses are expenditures for the value of the activities that are done to produce the desired income. Thus, Expenses are matched with Income.
Non-Accountants should bear in mind the distinction of each Account. For example, the purchase of Computer cannot be classified as Expense because it can be useful not only for current but also for future operations. In order to allocate the value for the use of the computer in the current period, the value should be allocated over the useful life through Depreciation. The Depreciation is considered as an Expense because it matches the Income for that certain current period.
These Accounts are further categorized as real and nominal accounts. Assets, Liabilities and Equity are real accounts because they are not closed at the end of the period but continue to exist with the business while Income and Expense are nominal accounts because they are closed at end of the accounting period.
Real Accounts are also called Balance Sheet Accounts because they form part of Balance Sheet while Nominal Accounts are also called Income Statement Accounts.
After knowing the categories of each Account, Non-Accountants must understand the Financial Statements. The Basic Financial Statements in Financial Accounting are Balance Sheet, Income Statement and Statement of Cash Flows.
Balance Sheet shows the financial position of the business as of the specified period. Non-Accountants should take note that, the word, As Of is important because it refers to the financial standing from the start of the business up to the current period. Balance Sheet is continuous (e.g. Balance Sheet as of December 31, 2011) The Balance Sheet shows that Assets should be equal to Liabilities and Equity (Assets = Liabilities + Equity). Thus, Balance is always the basic rule, as the balances of the debit accounts (Assets) should be equal to the balances of the credit accounts (Liabilities and Equity).
Income Statement shows the Net Income or Loss of the Business after deducting the necessary Expenses. Income Statement or Profit and Loss Statement is prepared to reflect a report for any given period of time. Income Statement for the fiscal year ended December 31, 2011 means the Income Statement from January to December 2011. Income Statement for the month ended December 31, 2011 means Income Statement from December 1 to 31, 2011. Income Statement Accounts are closed after the accounting period and balances for Income Statement Accounts start again for the next accounting period.
Statement of Cash Flows shows the inflows and outflows of cash. The ending balance of Cash is derived from Net Income plus and minus any movements or activities involving cash.
Financial Accounting is very broad but the basic concepts can be learned by Non-Accountants. The role of Accountants is to interpret the Financial Statements, while Non-Accountants do not need to interpret them but to understand them. In case of doubt, Non-Accountants should refer to a Professional Accountant to better comprehend Financial Accounting.