Tamiru Maka Plus

Basic Accounting Explained Simply Suppose a company called XYZ starts a business. The owner invests Birr 2,000,000. This amount is called Capital or Owner's Equity. Because the business needs additional money, it borrows Birr 500,000 from a bank. This borrowed money is called a Liability because it must be repaid. Therefore: Assets = Liabilities + Capital = 500,000 + 2,000,000 = Birr 2,500,000 Assets represent everything the business owns or controls. The Birr 2,500,000 may consist of: - Cash - Office equipment - Furniture - Inventory - Vehicles - Other business property For example, if the company spends Birr 800,000 on equipment: Cash decreases by Birr 800,000. Equipment increases by Birr 800,000. Total assets remain Birr 2,500,000 because one asset has been exchanged for another. Business Operations Once the business starts operating, it earns Revenue by selling goods or providing services. At the same time, it incurs Expenses, such as: - Salaries - Rent - Utilities - Transportation - Office supplies Every business transaction is recorded using the double-entry accounting system (Debit and Credit). Measuring Business Performance At the end of each month, quarter, or year, the company prepares an Income Statement. The Income Statement shows whether the business made a Profit or a Loss. Formula: Profit (or Loss) = Revenue − Expenses Example: Revenue = Birr 1,000,000 Expenses = Birr 600,000 Accounting Profit = 1,000,000 − 600,000 = Birr 400,000 Accounting Profit vs. Taxable Income Accounting profit follows accounting standards. Taxable income follows tax law. Some expenses are non-deductible, meaning they reduce accounting profit but are not allowed when calculating taxable income. Examples include: Certain fines and penalties Personal expenses paid by the business Other expenses disallowed by tax law. Assume the business has a non-deductible expense of Birr 50,000. Accounting Profit = Birr 400,000 Add back non-deductible expense = Birr 50,000 Taxable Income = Birr 450,000 Important: If the owner withdraws money for personal use (drawings), it is not an expense. It simply reduces the owner's equity and does not affect profit. Tax Calculation Assume the applicable tax rate is 35% with a deduction of Birr 24,600. Taxable Income = Birr 450,000 Tax = (450,000 × 35%) − 24,600 = 157,500 − 24,600 = Birr 132,900 (Actual tax depends on the applicable tax laws.) Net Profit After Tax = Taxable Income − Tax = 450,000 − 132,900 = Birr 317,100 This is the company's Net Profit After Tax. Other Financial Statements Businesses also prepare: Balance Sheet Shows Assets, Liabilities, and Owner's Equity at a specific date. Cash Flow Statement Shows how cash moves into and out of the business. A business can be profitable but still experience cash shortages, so all financial statements are important. Summary From this example, you have learned: What Assets, Liabilities, and Capital (Owner's Equity) are. The accounting equation: Assets = Liabilities + Owner's Equity. What Revenue and Expenses are. How to calculate Accounting Profit. What Non-Deductible Expenses are. The difference between Accounting Profit and Taxable Income. How taxes are calculated using taxable income. What Net Profit After Tax means. The purpose of the Income Statement, Balance Sheet, and Cash Flow Statement.

Basic Accounting Explained Simply Suppose a company called XYZ starts a business. The owner invests Birr 2,000,000. This amount is called Capital or Owner's Equity. Because the business needs additional money, it borrows Birr 500,000 from a bank. This borrowed money is called a Liability because it must be repaid. Therefore: Assets = Liabilities + Capital = 500,000 + 2,000,000 = Birr 2,500,000 Assets represent everything the business owns or controls. The Birr 2,500,000 may consist of: - Cash - Office equipment - Furniture - Inventory - Vehicles - Other business property For example, if the company spends Birr 800,000 on equipment: Cash decreases by Birr 800,000. Equipment increases by Birr 800,000. Total assets remain Birr 2,500,000 because one asset has been exchanged for another. Business Operations Once the business starts operating, it earns Revenue by selling goods or providing services. At the same time, it incurs Expenses, such as: - Salaries - Rent - Utilities - Transportation - Office supplies Every business transaction is recorded using the double-entry accounting system (Debit and Credit). Measuring Business Performance At the end of each month, quarter, or year, the company prepares an Income Statement. The Income Statement shows whether the business made a Profit or a Loss. Formula: Profit (or Loss) = Revenue − Expenses Example: Revenue = Birr 1,000,000 Expenses = Birr 600,000 Accounting Profit = 1,000,000 − 600,000 = Birr 400,000 Accounting Profit vs. Taxable Income Accounting profit follows accounting standards. Taxable income follows tax law. Some expenses are non-deductible, meaning they reduce accounting profit but are not allowed when calculating taxable income. Examples include: Certain fines and penalties Personal expenses paid by the business Other expenses disallowed by tax law. Assume the business has a non-deductible expense of Birr 50,000. Accounting Profit = Birr 400,000 Add back non-deductible expense = Birr 50,000 Taxable Income = Birr 450,000 Important: If the owner withdraws money for personal use (drawings), it is not an expense. It simply reduces the owner's equity and does not affect profit. Tax Calculation Assume the applicable tax rate is 35% with a deduction of Birr 24,600. Taxable Income = Birr 450,000 Tax = (450,000 × 35%) − 24,600 = 157,500 − 24,600 = Birr 132,900 (Actual tax depends on the applicable tax laws.) Net Profit After Tax = Taxable Income − Tax = 450,000 − 132,900 = Birr 317,100 This is the company's Net Profit After Tax. Other Financial Statements Businesses also prepare: Balance Sheet Shows Assets, Liabilities, and Owner's Equity at a specific date. Cash Flow Statement Shows how cash moves into and out of the business. A business can be profitable but still experience cash shortages, so all financial statements are important. Summary From this example, you have learned: What Assets, Liabilities, and Capital (Owner's Equity) are. The accounting equation: Assets = Liabilities + Owner's Equity. What Revenue and Expenses are. How to calculate Accounting Profit. What Non-Deductible Expenses are. The difference between Accounting Profit and Taxable Income. How taxes are calculated using taxable income. What Net Profit After Tax means. The purpose of the Income Statement, Balance Sheet, and Cash Flow Statement.