An understanding of the principles of bookkeeping and accounting is essential for anyone who is interested in a successful career in business. The purpose of bookkeeping and accounting is to provide information concerning the financial affairs of a business. This information is needed by owners, managers, creditors, and governmental agencies.

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An individual who earns a living by recording the financial activities of a business is known as a bookkeeper, while the process of classifying and summarizing business transactions and interpreting their effects is accomplished by the accountant. The bookkeeper is concerned with techniques involving the recording transactions, and the accountant’s objective is the use of data for interpretation. Bookkeeping and accounting techniques will both be discussed.

 

The Accounting Equation

The financial condition or position of a business enterprise is represented by the relationship of assets to liabilities and capital.

Assets: Properties that are owned and have money value—for instance, cash, inventory, buildings, equipment.

Liabilities: Amounts owed to outsiders, such as notes payable, accounts payable, bonds payable.

Capital: The interest of the owners in an enterprise; also known as owner’s equity.

These three basic elements are connected by a fundamental relationship called the accounting equation. This equation expresses the equality of the assets on one side with the claims of the creditors and owners on the other side:Assets = Liabilities + Owner’s Equity