1. Basic concepts

1. Basic concepts

In this training lesson, we will study what accounting is, what its main principles are, its terminology, and how accounting is used in a company. The is a very good site with clear and concise explanation of Accounting.

Let’s assume that Taras goes into the pizza business – namely, cooking and selling pizza. The name of the new company is The Tastiest. Taras will start his business by putting some of his personal savings into it. In effect, he is buying shares of The Tastiest’s common stock. This is the first initial transaction – the company receives cash but at the same time the company has a debt. Try to illustrate this transaction.

First Transaction

Imagine a circle which represents the whole company, its left side is the Assets and its right side is the Liabilities. Assets are the things that the company owns and are sometimes referred to as the resources of the company. Liabilities are obligations of the company; they are amounts owed to others. What the company owes the outsiders call Liabilities and what it owes the owner calls Owner’s Equity. So, the right side is Liabilities and Owner’s Equity (the type of Liabilities).

At the beginning the circle looks like a dot, because the company doesn’t have any Assets and

Liabilities. When Taras invests some of his personal money, the following occurs: the company gets cash (which is the Assets), but the company owes the money to Taras. Let’s assume that Taras invests 10 000$ into his business. The circle will look as follows:

Figure 1.1 Company balances after investment