Financial Accounting Basics: Part 1 – Getting Started
Financial Accounting Basics: Part 2 – Double Entry Accounting
Financial Accounting Basics: Part 3 – Post to the General Ledger
Financial Accounting Basics: Part 4 – Unadjusted Trial Balance
Financial Accounting Basics: Part 5 – Posting Adjusting Entries
Financial Accounting Basics: Part 6 – Adjusted Trial Balance
Financial Accounting Basics: Part 7 – Creating Financial Statements
Financial Accounting Basics: Part 8 – Post Closing Entries
This article is an introduction to getting started on the basics of financial accounting and your first journal entry.
There are many forms of accounting that will help run your business including Tax, Bookkeeping, Auditing, Managerial Accounting and most importantly Financial Accounting. Today we are going to begin discussing the basics of Financial Accounting so you can understand what all those numbers mean and how are produced. This is a basic overview that you would learn in a University course so that you could literally write it out by hand, but in your actual business you will still want the help of a professional accountant. These articles will help you understand where the numbers come from and how to de-construct your financial statements, balance sheets and cashflow statements.
So, what is Financial Accounting? Financial Accounting is the process of identifying, recording, summarising & analyzing an entity’s financial transactions and reporting them in the financial statements. If this doesn’t make sense to you then you are in good company and that is what this article is about to explain; exactly what accounting is and how you can use it yourself.
Imagine you own a newspaper covering all the current trends in business. We’ll call it BIG News. During February you run a promotional offer for annual subscriptions starting March 1st. People can’t get enough of your stories and you end up with $30,000 in new subscriptions paid for in cash. So, you’ve got the money now what?
Step 1 – Identify Transactions
The first step in financial accounting is to identify the transaction. So, you have $30,000 in new subscriptions and they begin March 1st and continue through to February 28th next year. The total transaction consists of the series of elements that includes the date and time frame but could also include totals and payments as well. Each membership in this case would be a separate transaction.
So, what’s next?
Step 2 – Prepare the Journal Entries
It is time to prepare a Journal Entry. A journal is a record of a financial transaction and it looks like this. You have a unique journal number, a date, a description, the accounts affected (in this case that’s cash and subscription revenue) and then you have your debits and credits which are both $30,000.
This is using double entry accounting which means this transaction affects at least two accounts and the total debits are equal to the total credits.
But why do we do it this way? Learn more about Financial Accounting in Part 2 where we discuss Double Entry Accounting and why we use it.