ACC - Accounting Principles [LESSON]

Accounting Principles

Introduction

In this lesson, we will explore the accounting equation in detail, differentiate between debits and credits, and discover the various steps in the accounting cycle.

Accounting | Knowledge Point & Video

As you watch the video below, answer the following questions:

1. What are the three main steps involved in accounting?
2. Explain the difference between internal and external accounting information users.
3. What do the generally accepted accounting principles (GAAP) refer to?
4. Who developed the basic accounting equation? What is the equation?
5. List the four main financial statements discussed in the video and briefly explain the purpose of each.

OER Source: EduCounting “Intro Accounting Overview - Basic Accounting (Animation) Links to an external site." Used according to terms of use.

The Accounting Equation

The most important concept in accounting is the accounting equation. The accounting equation serves as the foundation for recording and analyzing financial transactions. It provides a framework for understanding how assets, liabilities, and owner’s equity are related to each other. 

Accounting Equation | Activity

So, what exactly is the equation? Explore the object below to find out.

When analyzing the equation, you will notice that the equation must always be in balance. In other words, the total value of assets must equal the total value of liabilities and owner’s equity.

Each transaction that takes place impacts assets, liabilities, and owner’s equity in different ways. To better understand the accounting equation, let’s first define some key terms.

📝 T-accounts – visual representations of a company’s accounting journal entries. The shape of the T-account resembles the letter T.

📝 Debits – an accounting entry that results in either an increase in assets or a decrease in liabilities or equity. Debits are recorded on the left side of an accounting journal entry.

📝 Credits – an accounting entry that results in an increase in liabilities or equity and decreases assets. Credits are recorded on the right side of an accounting journal entry.

📝 Double-entry accounting – every financial transaction requires two entries, one debit and one credit.

Now that you understand the accounting terms, how does this fit together in the accounting equation? Analyze the image below and then answer the questions that follow.

❓ What is the accounting equation?

❓ How does a debit affect assets, liabilities, and equity?

❓ How does a credit affect assets, liabilities, and equity?

❓ Explain the concept of double-entry accounting and how it relates to the accounting equation.

The Accounting Cycle | Activity

The accounting cycle is a process that businesses follow to maintain accurate financial records and generate financial statements. The cycle consists of a series of steps that help businesses track their financial activities and ensure the integrity of the financial data. Explore the accounting cycle learning object below. Notice that the steps are a cycle meaning that each step happens in the same order and once the cycle is completed, it is repeated. Click each step in the object below to learn more.

Asset, Liability, or Equity | Practice Activity

Take some time to practice your new knowledge. Categorize each item as an asset, liability, or equity.

Debits and Credits | Practice Activity

Read each transaction description below. The accounts involved in the transaction are provided. Your job is to determine if the accounts should be debited or credited. Hint: remember that the accounting equation must always be balanced.

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Reflection

Considering everything you have learned in this lesson, why do you think Warren Buffet called accounting, “the language of business?”

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