After the financial transaction takes place, which is proven by direct and indirect documents, as previously explained, it is then analyzed to find out which accounts were affected by the financial transaction that took place.
Steps to analyze the financial process:
Determine the accounts affected by the financial process.
Determine the type of account and whether it is among the assets, liabilities, property rights, revenues, and expenses.
Determine the account on the debit side and the account on the credit side.
Preparing the accounting entry.
In this lesson, we will explain the first and second points, while the third and fourth points will be explained in the next lesson.
Determine the accounts affected by the financial process.
Determine the type of account and whether it is among the assets, liabilities, property rights, revenues, and expenses.
Determine the account on the debit side and the account on the credit side.
Preparing the accounting entry.
In this lesson, we will explain the first and second points, while the third and fourth points will be explained in the next lesson.
Account identification
The account can be defined as the record or container that contains within it all the financial movements that affected it after analyzing the financial transaction. For example, if the establishment carried out a transaction of selling goods worth $1,000 and got its value in cash, then when analyzing the financial transaction, we will find that it contains two accounts, a special account for sales that increased by an amount 1000 dollars and the cash account (the fund) increased by 1000 dollars, we conclude from that the following:
The account can be defined as the record or container that contains within it all the financial movements that affected it after analyzing the financial transaction. For example, if the establishment carried out a transaction of selling goods worth $1,000 and got its value in cash, then when analyzing the financial transaction, we will find that it contains two accounts, a special account for sales that increased by an amount 1000 dollars and the cash account (the fund) increased by 1000 dollars, we conclude from that the following:
The accounts are extracted after analyzing the financial operation.
One financial transaction contains at least two accounts, one of which is called debit and the other is called credit.
Classification of accounts
There are several classifications of accounts, and the most acceptable of these classifications is that the accounts be divided into five groups, as follows:
One financial transaction contains at least two accounts, one of which is called debit and the other is called credit.
Classification of accounts
There are several classifications of accounts, and the most acceptable of these classifications is that the accounts be divided into five groups, as follows:
Assets:
Asset accounts represent all the economic resources and assets owned by the establishment, and they are divided into several sections as follows:
Asset accounts represent all the economic resources and assets owned by the establishment, and they are divided into several sections as follows:
Current assets (short term):
These are the assets that the establishment owns in the form of cash or that are expected to be converted into cash during the next financial period, such as cash in the cash and bank, receivables, goods, notes (bills) and others.
Fixed Assets (Long Term):
They are the assets that the establishment owns for the purpose of assisting the establishment in carrying out its activity and using it for several years or for several subsequent financial periods, and the aim of their acquisition is not to resell them, such as lands, buildings, machinery, equipment, furniture, and others.
Intangible assets (long term):
These are the assets owned by the establishment that lack a tangible physical entity, such as the fame of the shop, trademark, patent rights, and others.
Other assets and debit balances:
Obligations (Liabilities):
It represents all the obligations and amounts due on the entity, and it is divided into short-term and long-term obligations as follows:
These are the assets that the establishment owns in the form of cash or that are expected to be converted into cash during the next financial period, such as cash in the cash and bank, receivables, goods, notes (bills) and others.
Fixed Assets (Long Term):
They are the assets that the establishment owns for the purpose of assisting the establishment in carrying out its activity and using it for several years or for several subsequent financial periods, and the aim of their acquisition is not to resell them, such as lands, buildings, machinery, equipment, furniture, and others.
Intangible assets (long term):
These are the assets owned by the establishment that lack a tangible physical entity, such as the fame of the shop, trademark, patent rights, and others.
Other assets and debit balances:
Obligations (Liabilities):
It represents all the obligations and amounts due on the entity, and it is divided into short-term and long-term obligations as follows:
Short term liabilities:
They are the obligations that the facility must pay during the next financial period (less than a year), such as accounts payable, short-term loans, notes (the bill of exchange) and others.
Long term commitments:
They are the obligations that the facility must pay during the subsequent financial periods (more than a year).
Property rights:
These are the accounts that represent the obligations of the establishment towards the owners of the establishment (partners), such as the capital account, the personal withdrawals account, the retained earnings account, and others.
They are the obligations that the facility must pay during the next financial period (less than a year), such as accounts payable, short-term loans, notes (the bill of exchange) and others.
Long term commitments:
They are the obligations that the facility must pay during the subsequent financial periods (more than a year).
Property rights:
These are the accounts that represent the obligations of the establishment towards the owners of the establishment (partners), such as the capital account, the personal withdrawals account, the retained earnings account, and others.
Revenue (sales):
These are the accounts that arise when selling goods or providing a service to others, such as selling computers or revenues from providing consulting services.
These are the accounts that arise when selling goods or providing a service to others, such as selling computers or revenues from providing consulting services.
Expenses:
They are the accounts that are created when the establishment obtains services from others that help it to carry out its activities and achieve its goals, such as electricity expenses, telephone and Internet expenses, advertising expenses, and others.
They are the accounts that are created when the establishment obtains services from others that help it to carry out its activities and achieve its goals, such as electricity expenses, telephone and Internet expenses, advertising expenses, and others.
Example
The following balances appeared in the trial balance of Al-Amal Trading Company on 12/31/2015 as follows:
The following balances appeared in the trial balance of Al-Amal Trading Company on 12/31/2015 as follows:
Fund printing revenues electricity expenses
Furniture and decoration Short-term loans Al-Amal Company (debtors)
Al-Tafa'ul Company (creditors) the capital of the bank
Personal Drawings Translation Revenue Copyright
Salaries and wages of computers, telephone expenses
Required :
Link each account to the group to which it belongs, based on what was previously explained.
Furniture and decoration Short-term loans Al-Amal Company (debtors)
Al-Tafa'ul Company (creditors) the capital of the bank
Personal Drawings Translation Revenue Copyright
Salaries and wages of computers, telephone expenses
Required :
Link each account to the group to which it belongs, based on what was previously explained.
Solution method:
Group account name
The fund is current assets
Printing Revenue Revenue
Electricity expenses
Fixed assets furniture and decor
Short term loans are short term liabilities
Al-Amal Company (debtors) are current assets
Al-Tafa'ul Company (creditors) has short-term obligations
Capital is property rights
The bank's current assets
Personal withdrawals of property rights
Translation revenue
Copyright is an intangible asset
Salaries and expenses
Fixed assets computers
Telephone charges
The fund is current assets
Printing Revenue Revenue
Electricity expenses
Fixed assets furniture and decor
Short term loans are short term liabilities
Al-Amal Company (debtors) are current assets
Al-Tafa'ul Company (creditors) has short-term obligations
Capital is property rights
The bank's current assets
Personal withdrawals of property rights
Translation revenue
Copyright is an intangible asset
Salaries and expenses
Fixed assets computers
Telephone charges
budget equation
The relationship between the five main accounts can be represented by the following equation:
The relationship between the five main accounts can be represented by the following equation:
Enterprise resources and assets (assets) = Liabilities towards third parties + Liabilities towards owners (property rights)
i.e.:
i.e.:
Assets = Liabilities + Equity
The property rights are as follows:
The property rights are as follows:
Equity = Capital - Personal Withdrawals + (Revenues - Expenses)
So the equation becomes in its final form:
So the equation becomes in its final form:
Assets = Liabilities + (Capital - Personal Withdrawals + Revenues - Expenses)
This equation is called the budget equation or the accounting equation, which states that the budget contains two sides, one of which represents assets and the other side represents liabilities and property rights, and both sides must be equal when any financial transaction occurs, so if any financial transaction occurs, it will either affect the assets side only Or in terms of obligations and property rights only, or in both together, while maintaining the balance of the budget.
This equation is called the budget equation or the accounting equation, which states that the budget contains two sides, one of which represents assets and the other side represents liabilities and property rights, and both sides must be equal when any financial transaction occurs, so if any financial transaction occurs, it will either affect the assets side only Or in terms of obligations and property rights only, or in both together, while maintaining the balance of the budget.
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