Basics of Accounting – Unit 1 – Class 1

1. Double Entry Accounting

- Meaning: A system where every financial entry is recorded twice: once as a debit
and once as a credit.
- Sentences:
- When we received a payment from a client, our accountant used double entry
accounting to debit the cash account and credit the revenue account.
- Under double entry accounting, purchasing new office furniture led to a debit in the
office furniture account and a corresponding credit in the accounts payable account.

2. Accrual Basis
- Meaning: Revenue and expenses are recorded when they are earned or incurred, not
necessarily when the money is exchanged.
- Sentences:
- On an accrual basis, we recognized revenue from services rendered this month,
even though the payment will only be received next month.
- Our rent expense for December was recorded on an accrual basis in December's
financial statements, despite the rent payment being due in January.

3. Consolidation
- Meaning: The process of combining the financial statements of several departments
or subsidiaries into one comprehensive financial statement.
- Sentences:
- The financial team completed the consolidation of the financial statements from all
subsidiaries for the annual report.
- Due to consolidation, the total revenue reported on the parent company’s financial
statement included the revenue from all its subsidiaries.

4. Fair Value
- Meaning: The estimated market value of an asset or liability based on current prices
in an open and competitive market.
- Sentences:
 - The fair value of our commercial real estate was reassessed this year to reflect the
recent increase in market prices.
- Financial instruments like derivatives are often reported at fair value to ensure
transparency in financial reporting.

5. Going Concern
- Meaning: The assumption that a company will continue its operations for the
foreseeable future without the need for liquidation or bankruptcy.
- Sentences:
- The assumption of going concern allows us to defer some expenses over future
periods since the company is expected to be operational.
- Our auditor evaluated whether our company can continue as a going concern before
finalizing the audit report.