Fundamental Accounting Course: Equations, Principles, and Examples

This assignment provides a comprehensive overview of fundamental accounting principles and practices. It begins by introducing the Generally Accepted Accounting Principles (GAAP) and the importance of the accounting equation (Assets = Liabilities + Capital) in understanding business success and failure. The assignment details the components of the accounting equation, including assets (current and non-current), liabilities (current and non-current), and capital. It explains key accounting concepts such as going concern, accrual basis, separate entity, and periodicity. The assignment also covers the accounting process, from identifying and analyzing transactions to preparing financial statements. It explores the double-entry system, journal entries, and the classification of accounts. Examples and quizzes are included to facilitate understanding and knowledge application. The content is designed to provide a solid foundation for further study in accounting.

Course Topics

2
Course Topics (Fundamental accounting and equation)
Overview
In fundamental accounting, we will learn about the equations and test the knowledge using a quiz
after every two to three topics. Considering the accounting equation shows the relationship
between three elements of balance sheet assets, liabilities, and capital. This course aims to learn
how to do fundamental accounting using equation. This course first covers the accounting
principles and its concept. The second topic covers the various accounting components with its
description. The third topic involves the accounting equation that shows the relationship between
the three elements. Some sample examples of the accounting equation are also given for a better
understanding. How the transactions recorded in the double-entry system and its impact
accordingly. The various steps involved in accounting are also considered in this course. The
main aim of this topic is to understand basic accounting to form a base for accounts. The further
expansion of knowledge in accounting can be possible with this basic understanding.
Introduction
The purpose in preparation of financial statements is to follow the generally accepted accounting
principles (GAAP). This principle is based on fundamental accounting and concepts. The
advanced accounting terms start from fundamental accounting. The objectives of financial
accounting are to help the small business owner to large business holders. These fundamentals
help to understand the equation that determines all business failure and success.
The basic accounting principles are highlighted as going concern concept, accrual concept, entity
concept, periodicity concept, and the last monetary unit concept. This accounting assumption

3
Course Topics (Fundamental accounting and equation)
provides the guidelines in preparation, presentation, and interpretation of financial statements.
Going concern refers to the consistency in business, the operation of the company can continue
for an indefinite period. The accrual concept is recognized as the income earned not the income
collected. The entity concept treated the business as one accounting entity. This entity is a
separate legal entity in the eyes of law. Periodicity concept shows the period of business that is
divided into its subtypes. In preparation of the various financial statement, the periodicity
concept usually has equal length of a period. The last that is the monetary unit concept study the
transaction in terms of currency.
The elements of accounting include three elements namely assets, liabilities and capital. Assets
are the owned resources of the company. They can be classified into two different parts that are
current assets and noncurrent assets. Liabilities mean the obligation to the company to pay off
the creditors and lenders. This is also classified into two parts namely current liabilities and non-
current liabilities. Capital means the interest of the owner in the company’s performance by
deducting liabilities from the assets. In the accounting equation, when the transaction takes place
the changes cause, only to stay the equation in balance. This happens because the changes occur
in two aspects the account recorded in the financial statement
Principles of fundamental accounting:
A) Preparation of financial statement
B) Presentation of financial statement
C) Interpretation of financial statement

4
Course Topics (Fundamental accounting and equation)
There is a different assumption in accounting concepts such as going concern, accrual system,
entity concept, and monetary unit.
Going concern
Going concern reflects the consistency of business over a long period. This concept is also
known as continuity, the business will continue financial statement assumption according to
going concern assumption the balance sheet items are recorded at its cost, not at fair market
value. Long term assets are fully used and replaced in the books of accounts. Going concern
means the continuity in business for an indefinite time, where financial statements are made
keeping in mind that business will continuously exist in the future.
Accrual basis
This method records the values of income when they are earned not when they are incurred.
A company rendered some services to the client
Separate entity
Separate entity concept re
Periodic concept
The indefinite life the periodic concept follows two periods:

5
Course Topics (Fundamental accounting and equation)
A calendar year means 12 months sub
Monetary unit
The monetary units have classified into two types- quantifiability and stability of the money.
Quantifiability recorded the amount in terms of the money.
Stability of the currency the purchasing power of the
Matching principle- matching the concept
Revenue recognition principle- based on the accrual concept, income is recorded at cost rather at
fair market value; this concept follows the same income recorded in the financial statement
performed when the sale takes place. In case though the amount is not yet collected.
Expenses recognition: based on the accrual concept, expenses are also recorded incurred at cost
rather at fair market value; this concept follows the same the expenses paid as recorded in the
financial statement.
Historical cost

6
Course Topics (Fundamental accounting and equation)
The items shown in the balance sheet are usually recorded at historical cost. Whereas various
items shown in the financial statements are recorded at market value, current cost and discounted
amount.
Accounting
Assets
Current assets:
Current assets examples are
The three main components of accounting are assets, liabilities, and capital
Accounting process
 Identification and analysis of business transactions
 Recording the transaction in journal entry account
 Posing entries to ledger
 Preparation of entering an adjustment
 Trial balance adjustment
 Financial statements
 Post-closing trial balance

7
Course Topics (Fundamental accounting and equation)
1) What is the calendar year?
 The period from 1st January to 31st December
 The period from 1st April to 31st March
 The period starts from any of the months
 None of the above
2) What is the fiscal year?
 The period from 1st January to 31st December
 The period from 1st April to 31st March
 The period starts from any of the months
 None of the above
3) What are the two features of the monetary unit assumption?
 Quantifiability and stability
4) Which item shown in balance sheet asset side
 Prepaid expenses
 Prepaid insurance
 Both (A) and (B)
 None of the above
5) Which account is a current asset account?
 Bills payable
 Closing stock

8
Course Topics (Fundamental accounting and equation)
 Building
 Any of these
6) Which account is a non-current asset account?
 Cash in bank
 cash in hand
 land and building
 account receivable
7) What type of account is Accrued rent payable account?
 current assets
 non-current asset
 Both (A) and (B)
 None of the above
Current assets
Current assets are those assets that can be within one year. The examples of current assets are
cash and cash equivalents, marketable securities, prepaid expenses, inventories. These assets are
short term assets, the main element of the company's working capital.
Current assets- cash and cash equivalent + accounts receivable+ inventories+ marketable
securities+ prepaid expenses other liquid assets.
Cash and ash equivalent- this includes bills, funds, coins, cash in bank cash at hand, etc.
Receivables- accounts receivable, bills receivable, rent receivable, and others.
Inventories- assets held for trading in the daily business.

9
Course Topics (Fundamental accounting and equation)
Prepaid expenses- expenses that are paid in advance they are known as prepaid expenses.
Non-current assets
Non-current assets are those assets that are not expected to be consumed within one year. Non-
current assets are as follows: investments, land and building, intangible assets, other assets.
Liabilities
Liabilities are the company's obligations or payables of the business, the company's assets that
are as follows: the amount borrowed from the creditors and lenders. The contribution made by
the shareholders and the capital introduced in the business. They are also categorizing in current
and non-current liabilities.
Current liabilities
Current liabilities mean those liabilities having an obligation and due within twelve months.
Examples of current liabilities are:
Trade payables- bills payable, account payable, rent payable, interest payable, accrued expenses,
notes payable etc.
Provisions-
Short term borrowings- loans, credit available for a short period.
Tax liabilities- tax involves shortly paid taxes.
Non-current liabilities

10
Course Topics (Fundamental accounting and equation)
Those liabilities that are not currently payable and
Examples of non-current liabilities are:
Long term liabilities, bonds, mortgage, deferred tax payables.
Capital
Capital is also known as equity capital, the amount remained after all liabilities pay off. Capital =
total assets – total liabilities.
The comparison in the owner's contribution expresses as the capital increases, drawings, and the
expenses decreased. Ownership is the reason that the proportion takes place in the capital. The
sole proprietorship capital includes owner equity. In partnership, capital includes the partner's
equity and in the corporations, it includes stockholders equity.
With the three elements the two items also important in accounting.
Income
Income also reflects the proportion I liabilities and assets, increase and decrease in assets and
liabilities. Revenues are the amount represented by the ordinary course of business.
Expenses
This item implies the proportion that is increase and decrease in liabilities and assets resulted in a
decrease in equity excluding owners' distribution. Expenses include daily expenses that take

11
Course Topics (Fundamental accounting and equation)
place in business, sales, advertising, rent, salaries, income tax, and repairs. The net income of
business expresses as all income minus all expenses.
Equation
The accounting equation followed double-entry accounting. All the transaction recorded in the
journals has two effects that are debit and credit. This equation helps in the preparation of the
Balance sheet. Debit recognized as the left side and credit as the right side. When the transaction
takes place the changes cause in the accounting equation, only to stay the equation in balance.
This happens because the changes occur in two aspects the account recorded in the financial
statement. The changes on the left side similarly change the right side of accounts.
Examples using accounting equation are
Maxwell put its property $ 6000 to star
Accounting equation derived mathematically to express the relationship between assets,
liabilities, and capital. When the business starts, the assets are contributed by owners and
acquired from the lenders or creditors. All the transaction has different aspects.
All transaction in accounting has a matching concept; there are two effects of a recorded
transaction.
Assets= liabilities + shareholders equity
Assets= liabilities + capital
Double-entry accounting system

12
Course Topics (Fundamental accounting and equation)
Double-entry system
For example- a company borrows a loan from the bank, the cash is increased and the account
payable is also increased.
A company
Single-entry bookkeeping
As the name suggests this system does not record the transaction in two aspects. Separate books
of account are maintained for this transaction like cash
Date Particulars Amount Balance
08/05/201
8
Balance c/d $
08/05/201
8
Owners investment $ 40,000 40,000
08/09/201
8
Purchases (2,000) 38,000
10/12/201
8
Cash from customers 1000.00 39,000
Double-entry accounting system

13
Course Topics (Fundamental accounting and equation)
The given rule is when an asset increased, the transaction is debited and when the liabilities
increased the transaction is credited. Whereas the asset decreased, the transaction is credited and
when the liabilities decreased the transaction is debited. This application is the same applied to
capital also. Debit the expenses and credit the income. A journal entries format included the date
of transaction, account wise classification as debit and credit side. And narration to describe.
The double entry system during olden times the merchants recorded the transaction using a
single list. As time passes the complexity of business increased however the advanced system of
accounting came. Double-entry bookkeeping recorded a transaction in two aspects.
Considering an example the transaction given below is:
On December 2018, Mrs. Annie
A single entry system uses cashbooks to record the cash receipts. After recording the transaction
the cashbook shows:
According to the double-entry system the debit and credit side
There are golden rules in accounting:
Accounting Increase Decrease

14
Course Topics (Fundamental accounting and equation)
Similarly, basic accounting expanded accounting also reflects the relationship between
accounting components. The difference between both the accounting equation is highlighted. In
this accounting equation, the capital is classified into several elements, contribution, drawings,
income, and expenses. The proportion of capital increases due to contribution and income.
Whereas drawing and expenses decrease the proportion of capital. Assets =
Owners contribution and additional contribution also recorded into capital.
Accounting process
The introduction of the accounting process is first to identify and analyze the transaction. Not
every transaction needs to be entered into this system.
For example, the loan made by the company's owner that does not link to business entities loans.
The transactions are identified and reflect the knowledge of how the business affected and the
amount recorded. The preparation of a business account serves a basis to record a transaction.
Journals recording
The journals are recorded manually or electronically. This transaction recorded contains a
minimum of two accounts. to simplify the process these journals are often used in the transaction
recording and they record frequently such as sales, cash receipts, etc. this is the general recording
takes place not the special book treatment. The transaction that is recorded is in chronological
order. These journals are also called as books of original entry.
Ledger posting

15
Course Topics (Fundamental accounting and equation)
After the journal entry system the recorded journal post in the ledger account. This process is
also known as books of final entry. The ledger shows the changes in each account according to
its past transactions. All the transactions posted in the ledger can now be evaluated. The debit
and credit of all the accounts made to cash transferred in cash accounts. and then the owner can
calculate the proportion in assets and liabilities concerning cash that is increased or decreased.
Conclusion
Here in this course, all the elements are covered. The accounting equation discussed above
shows the relationship between assets and liabilities in its basic form and also in its expanded
form. The two aspects involved in each example of the accounting equation. This is the impact of
two accounts in the financial statement that takes place. The change in one side of the account
directly linked to the change on the other side of the accounting equation. The balance of
accounting is done with such. This equation helps in understanding accounting principles in
accounting problems.
Final quiz
The double-entry system involves how many accounts?
One
Two
Three
Four

16
Course Topics (Fundamental accounting and equation)
Swieringa, R. J. (2016). Memorial: Robert T. Sprouse and Fundamental Concepts of Financial
Accounting. Memorial Articles for 20th Century American Accounting Leaders, 378.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Turtle, H. J., & Wang, K. (2017). The value in fundamental accounting information. Journal of
Financial Research, 40(1), 113-140.
Juárez, F. (2016, August). The accounting equation and claims on assets value change. In 2016
Third International Conference on Mathematics and Computers in Sciences and Industry
(MCSI) (pp. 246-251). IEEE.
Smith, M. (2018). Luca Pacioli: The father of accounting. Available at SSRN 2320658.
Juárez, F. E. R. N. A. N. D. O. (2016). The Dual Aspects of Accounting Transaction and the
Assets Claims on Assets Equality in Axiomatic Theory. International Journal of Mathematical
and Computational Methods, 1, 128-134.
Sitdikova, L. B., Starodumova, S. J., & Volkova, M. A. (2018). Aspects of Transactions by
Business Entities in Civil Legislation. European Research Studies Journal, 21(4), 557-566.
Sahadeo, C. (2018). Basic Financial Accounting. Financial Literacy and Money Script (pp. 207-
229). Palgrave Macmillan, Cham.
John, G., Viswanathan, M., & Ghosh, M. (2019). A transaction cost approach to channel design
with application to multi-channels settings. In Handbook of Research on Distribution Channels.
Edward Elgar Publishing