Accounting Basics: Easy Ways to Understand Accounting

You know baseball ? Accounting has an important role in a business. To be able to understand business well, we must understand the basics of accounting. By understanding the basics of accounting, it is hoped that accounting information can be used as the basis for making decisions to manage a business properly. Accounting is a discipline that studies the measurement, description or provision of certainty regarding information that will help managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations and government institutions.

Some people still find it difficult to master accounting, because there are many things and points about accounting that must be memorized and applied as if accounting is a dizzying science. In fact, if you already know the key, it is guaranteed that accounting is no longer a difficult science. Therefore, this time we will find keys and easy ways to understand basic accounting for beginners.

What is Accounting?

To be able to study a science, of course we must understand the meaning and purpose of that science. Included also in accounting. It is very important to know and understand what accounting is. In general, accounting means a process of recording, classifying, summarizing, processing and presenting data, transactions and events related to finance so that it can be easily understood by interested people for making decisions and for other purposes. If this understanding has been properly understood, it will be easy to learn the next points of accounting.

Accounting is the systematic and comprehensive recording of financial transactions of a business during a certain period. Accounting is also defined as a process of summarizing, analyzing and reporting business financial transactions. Transaction is defined as an agreement between two parties, in which one party sells goods or services, while the other party buys the goods or services. A business transaction must be able to measure its value in money or in other words it can be expressed in currency.

The Need for Separation of Personal and Business Money

One of the keys to success in running a business is separating personal money from company money. For this reason, all transactions that occur between business owners and the business itself must be clearly recognized and recorded. Between the business owner and the business, there are two transactions that occur, which are as follows:

  • Capital , which is the amount of money deposited by a business owner to his business or business.
  • Drawing ( Pirve ), which is an amount of money taken by the business owner from the business or business.

Accounting Components

Next, we will discuss the components of accounting. In accounting records, a transaction is recorded and grouped based on certain categories. Based on the recording category, there are 5 main components in accounting, namely as follows:

Assets (Assets)

It is anything that has value and belongs to the company. Thus, assets are all company assets, whether visible or invisible, which have a monetary value or can be converted into money and are useful for the company in the future. The assets of this company are further classified into several parts, namely:

Current Assets (Current Assets)

Accounting for any assets with a disbursement period of less than one year. Current assets can also be referred to as assets with high liquidity. Examples of current assets are cash, accounts receivable, merchandise inventory, and supplies. The following is an example of an account that includes current assets:

  • Current assets of a company consisting of banknotes, coins, and valuable paper which have the same characteristics as money. Cash is one of the assets that can be converted the fastest into other types of assets.
  • Stock of goods. These are usually items purchased for the purpose of reselling, with the hope of making a profit.
  • This is a claim or claim against a third partythat arises because of a transaction.
  • Notes receivable. This is a receivable in the form of a written agreement sent from the debtor to the creditor to pay the amount stated in the agreement letter at a certain time in the future.
  • All equipment used for the smooth running of the business, which are used up, such as pens, markers, paper, etc.
  • Paid in advance. These are things that are paid directly at the beginning of the period for a specified period of time.
  • Securities. Securities or shares are temporary ownership of shares or bonds in other companies, which can be sold at any time.

Fixed Assets (Fixed Assets)

Fixed assets means there is a form for the company’s operational activities to be used for more than one year and not for sale. For example, buildings, machinery (equipment), company operational vehicles, land, and others.

Liabilities (Liabilities or Debt)

Do you know what liabilities are ? Liabilities are the company’s obligation to pay a certain amount of money to other parties. One of the sources of wealth in a company comes from people who provide loans (creditors), with accounts in the form of types of debt:

Current Debt

Like current assets, current debt must be paid off in less than one year. Examples of current accounts, namely:

  • Accounts payable is debt that is usually due to companies buying goods on credit.
  • Accrued expenses . In essence, the company uses its benefits first before paying, such as salary debts, the company already benefits from employees who work every day, but the company will only pay at the end of the month.
  • Income received in advance . If this is the case, the company receives money first and then does it. So, the company has a debt to the client to do the work.

Long-term debt

Long-term debt is debt with repayment of more than one year, and usually over three years. Examples of long-term debt include:

  • Bonds payable . This is the debt that a company incurs in buying bonds.
  • Mortgage debt . This is debt incurred using collateral. If you’ve ever played the monopoly board game , there’s the term mortgage, right? So, if you borrow money from the bank using collateral, for example, a private building and when you cannot pay, the bank has the right to confiscate the guarantee in exchange for the debt.

Equity (Equity or Capital)

Obligations of companies to owners of capital who invest in the company. Everything that a company owns to support the performance and operation of a company is considered capital. So besides cash, it can be in the form of a place of business, machines, computers, and others. The source of capital is divided into two, namely:

  1. Internal capital , namely capital that is obtained by yourself, and can come from profits, or it is private property from the start.
  2. External Capital , namely capital obtained from outside sources, such as bank loans.

Income (Income)

The income is the nominal earned by a company from the sale of goods or services. Income can also be obtained from rent or interest. If the company rents out the place, it will definitely get money, and that goes into income (rent) or if the company lends money to another party and gets interest it is also called income (interest). So, there is income that comes from business activities, such as buying and selling merchandise, and income outside the business, as mentioned above, namely rental income and interest income.

Expenses (Costs / Expenses or Expenses)

Money spent by the company to finance business operations. Now, this is the opposite of income. Any amount that is issued by a company to run its business is called an expense. For example, namely:

  1. Salary expenses , namely expenses to pay the salaries of employees of a company.
  2. Rental expenses , for example to pay for rent for buildings or equipment.
  3. Interest expense , namely the company’s expense to pay interest, such as interest on bank loans.

Accounting Purposes

After we discuss the components of accounting, now we will return to the basics of accounting, namely the objectives of accounting. The purpose of accounting is to provide financial information for a business. This financial information usually includes the company’s performance, financial position, and cash flow. Financial information is summarized in the form of financial statements.

Financial statements

Because the purpose of accounting is to provide financial reports. So, financial statements are the output of the accounting system. The following are the four main financial statements of the company:

  • Statement of Financial Position. This report is also known as the balance sheet. This report provides information about an entity’s financial position at a specific point in time. In the statement of financial position, the assets, liabilities and equity of a business are presented.
  • Profit / Loss Statement. Present a statement of net income (net loss) for a business for a certain period. This report presents the income generated and the expenses that occurred during a certain period.
  • Capital Change Report. Summarize changes or adjustments in equity during a specific period (the same period as the Profit / Loss Statement) . This report presents the changes in capital and retained earnings.
  • Cash Flow Statement. Shows the amount of cash that enters and leaves the company during a certain period (the same period in the Profit / Loss Report and the Capital Change Report) including operating, investing and financial activities.


by Abdullah Sam
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