1
Chapter 1
FINANCIAL STATEMENTS: PERSONAL ACCOUNTING
learning outcomes
1
Describe the purpose of accounting
2
Describe the balance sheet and the income
statement
3
Define an accounting period
4
Explain how the accounting equation works
5
Explain accrual-based accounting
6
Explain how to account for debt and assets
7
Explain how to account for prepaid expenses
8
Distinguish between capital and revenue
9
Demonstrate how double entries are recorded in
T-accounts
The Purpose of Accounting
Accounting
is a system to identify, measure and communicate all the financial activities of an indi-
vidual or a business. Personal accounting tracks how much an individual is worth. Whether you
choose a simple or luxurious lifestyle, you need money to sustain your personal life. Most people
want to save enough money to allow them to retire comfortably.The better you can manage your
finances and bring in more money than you spend, the more you will be worth.
It is important to maintain records of the activities that increase or decrease your net worth (i.e.
how much you earn, how much you invest and how much you spend). The key concepts that
drive your personal economic life are very similar to those used in business. In fact, learning basic
accounting is a crucial life skill for everyone.
Most people associate accounting with calculators, computers and long lists of numbers. That
may be true to some degree when you are a practicing bookkeeper or accountant; however, under-
standing accounting involves not only numbers but also a logical way of thinking.
Here is an example of the logic behind one of the concepts you will learn in this course: the concept
of net worth. Which scenario in Figure 1.1 would you prefer?
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