Master Accounting Basics to Elevate Your Payment Product Management

1. Accounting Equation and Variations

The fundamental accounting identity is Assets = Liabilities + Owner's Equity . Variations include Profit = Revenue - Expenses and Assets + Expenses = Liabilities + Owner's Equity + Revenue . Understanding these five aspects helps clarify debit/credit directions, the accounting element identity, account structures, transaction processing, and a mnemonic for maintaining balance.

2. Accounting Cycle

The accounting cycle repeats over a period (daily, monthly, quarterly, yearly) and includes the following steps:

Collect source documents (vouchers, receipts, invoices).

Prepare accounting vouchers or journal entries according to financial standards.

Post entries to the ledger.

Perform trial balance to verify debits equal credits.

Adjust entries if the trial balance does not balance.

Close accounts at period end, transferring revenues and expenses to profit.

Prepare financial statements.

3. Ledgers and Vouchers

Ledgers are structured books that record economic transactions based on audited vouchers. Key ledger types include:

General Ledger : Three-column format (debit, credit, balance) summarizing all accounts.

Subsidiary Ledger : Detailed records for specific account categories.

Bank Cash Book : Records daily cash inflows, outflows, and balances for bank deposits.

Vouchers are written evidence of transactions, divided into original vouchers (e.g., invoices) and accounting vouchers (payment, receipt, transfer vouchers).

4. Chart of Accounts and Accounts

Accounts are created based on chart of accounts items and record transaction details such as date, summary, voucher number, debit/credit amounts, and balance. Accounts can be classified as:

General accounts (summary level).

Subsidiary accounts (detailed level).

5. Double‑Entry Bookkeeping

Double‑entry bookkeeping records each transaction in at least two accounts with equal debit and credit amounts. Rules include:

All accounts have a left (debit) and right (credit) side.

Asset and expense accounts increase on the debit side, decrease on the credit side.

Liability, equity, and revenue accounts increase on the credit side, decrease on the debit side.

Typical journal entry format:

Debit   Account   Amount

Credit  Account   Amount

6. Reconciliation

Reconciliation verifies ledger records against vouchers, between ledgers, against physical assets, and against financial statements.

7. Closing

Closing transfers temporary account balances (revenues, expenses) to permanent accounts (profit) and prepares the books for the next period.

8. Trial Balance

The trial balance checks that total debits equal total credits and that ending balances are consistent across accounts.

9. Financial Statements

Financial statements (balance sheet, income statement, cash flow statement, statement of changes in equity) summarize an entity's financial position and performance.

10. Bank Reconciliation Statement

This statement matches the company's cash book balance with the bank statement balance after adjusting for outstanding items.

11. Accounting Treatments for Different Items

Examples of journal entries for cash, accounts receivable, bad debts, revenue and expense closing, and profit distribution are provided to illustrate practical bookkeeping.