Principles of accounting - Assignment Example

It is important for you as a business owner to keep track of your economic activity by using an accounting system. The use of a computerized systemcan facilitate the process. One of the best and most affordable computerized accounting systems is Peachtree Accounting. You can purchase a copy for less than $200. In order to use the program you must learn the basics of accounting. To practice accounting you must learn about the double entry system developed by Luca Pacioli in 1494 (Tamu, 2008). The double entry system is based on the application of journal entries composed of debits and credits.

Each journal entry must have a credit and debit of equal amount. There are different ledgers accounts used in an accounting system such as the cash, expense, account receivable, equity, accounts payable, sales, and depreciation account among others. Each account has a normal balance. If the normal account is a debit the account increases through debit and decreases by way of a credit. When the normal account is credit the account increases through a credit and decreases by a debit. The income statement is a very important financial statement that provides information regarding the profitability of a company during an accounting period.

All financial statements are prepared at the end of the accounting cycle. There a certain journal entries that affect only the income statement. An example of a journal entry that affects the income statement is recording a cash sale. For instance if the business makes a sale and the customer pays by cash the corresponding journal entry is a debit to cash and a credit to sales. Based on the assumption that the normal balance of cash is debit this transaction increases the cash account of the company because the firm received money.

The balance sheet is another major financial statement that is regarded as a statement of position. The balance sheet provides the financial position of a company in terms of assets, liabilities, and equity at a specific point in time. The balance sheet is based on the basic equation of accounting that states that assets equal liabilities plus stockholders equity (Moneyinstructor, 2005). An example of a journal entry that affects the balance sheet is the payment of a long term debt by way of cash.

The corresponding journal entry for this transaction is a debit to the long term debt account and a credit to the cash account. The assumption behind this transaction is that all debts including long term debt are reduced through a debit because the normal account of all liabilities accounts is credit. References Moneyinstructor.com (2005). Introduction to Transaction Analysis. Retrieved July 19, 2011 from http://www.moneyinstructor.com/lesson/accountingtransaction.asp Tamu.edu (2008). Luca Pacioli: The Father of Accounting.

Retrieved July 19, 2011 from http://acct.tamu.edu/smith/ethics/pacioli.htm