Accounting and Banking Basics: A Comprehensive Guide
What is Accounting?
Definition of Barter
Barter is the exchange of goods or services without the use of money.
Formal Accounting
Formal accounting is carried out by businesses, institutions, and professionals. It follows established standards and regulations, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
Informal Accounting
Informal accounting is typically used for personal or small business finances, such as tracking bi-weekly expenses.
Accounting as the “Business Language”
Accounting is often referred to as the “Business Language” because it provides a standardized way to record, analyze, and communicate financial information.
Key Principles in Accounting
- Integrity: Accountants must be honest and ethical in their work.
- Objectivity: Accountants must be unbiased and impartial in their judgments.
- Independence: Accountants must be free from any conflicts of interest.
- Confidentiality: Accountants must protect the privacy of their clients’ financial information.
- Competence: Accountants must have the necessary skills and knowledge to perform their duties.
Generally Accepted Accounting Principles (GAAP)
GAAP aims to ensure that financial information is reliable, comparable, and understandable.
International Financial Reporting Standards (IFRS)
IFRS are accounting standards used by public companies in many countries around the world.
Transparency in Accounting
Transparency in accounting involves providing clear and accurate financial information to stakeholders. This includes presenting information in a way that is easy to understand.
Banking Basics
Checking Accounts
Checking accounts are used for everyday spending. They typically allow you to write checks, use a debit card, and make online payments.
Do Checking Accounts Generate Interest?
No, checking accounts generally do not earn interest.
Savings Accounts
Savings accounts are designed to help you save money. They typically earn interest, although the interest rate may be low.
How Do Savings Accounts Work?
In savings accounts, your money grows over time due to the accrued interest.
Debit Cards
Debit cards can be used to make purchases or withdraw cash from your checking or savings account.
What is Required to Get a Debit Card?
To get a debit card, you typically need to have a bank account and provide proof of address.
Automated Teller Machines (ATMs)
ATMs allow you to perform various banking transactions, such as withdrawing cash, making deposits, transferring funds, and checking your account balance.
Main Function of an ATM
The main function of an ATM is to provide convenient access to your bank account 24/7.
Advantages of ATMs
- Quick service
- Accessibility
Disadvantages of ATMs
- Potential for fees
- Security risks
Types of Bank Accounts
- Checking Accounts: Used for daily transactions.
- Savings Accounts: Used to save money and earn interest.
Bank Loans
A bank loan is an agreement where a financial institution provides a borrower with a certain amount of money that must be repaid over a defined period, often with interest.
Source Documents in Accounting
Source documents are the original records of financial transactions. Examples include checks, invoices, receipts, and bank statements.
Users of Financial Information
- Internal Users: Managers, employees, and owners who use financial information to make decisions about the business.
- External Users: Investors, creditors, and government agencies who use financial information to assess the financial health of the business.
Ethics in Accounting
A code of ethics is a set of principles that guide the behavior of accountants. It emphasizes honesty, integrity, and professional responsibility.
Assets
Assets are resources owned by a business that have future economic value. Examples include cash, accounts receivable, inventory, and property, plant, and equipment.
Liabilities
Liabilities are obligations or debts owed by a business to others. Examples include accounts payable, loans, and mortgages.
Equity
Equity represents the owners’ stake in the business. It is the difference between assets and liabilities.
The Going-Concern Principle
The going-concern principle assumes that a business will continue to operate indefinitely.
Prudence in Accounting
Prudence is a concept that encourages accountants to be cautious and conservative in their estimates and judgments.
Non-Profit Organizations
Non-profit organizations operate for purposes other than making a profit. Examples include charities, schools, and hospitals.
For-Profit Businesses
For-profit businesses operate to earn money for their owners.
Transactions
A transaction is a business activity that involves an exchange of value, such as buying or selling goods or services.
Profit
Profit is the financial gain a business earns when its revenue exceeds its expenses.
Expenses
Expenses are the costs incurred by a business in its operations. Examples include wages, rent, and utilities.
Accountants
Accountants are professionals who are responsible for keeping and interpreting financial records.