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ACCOUNTING

What is accounting?
What does Financial Statements mean?

Accounting is a science that records, classifies, summarizes and reports the financial transactions of businesses.

Businesses report the transactions they account for within a certain accounting discipline in the form of financial statements. The most important of these statements are the balance sheet and income statement. Let's start with the balance sheet from these tables.


Balance Sheet (Status) Table

It is a table showing the status of an enterprise within a certain period of time. If you want to take a picture of a business, take a look at its balance sheet. Below is an example of a balance sheet in a very simple form.

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Let's try to understand the table. The left side of the balance sheet refers to the company's assets. Assets that can be converted into money with a term of one year or less than one year refer to current assets, and assets that can be converted to money with a maturity of more than one year refer to fixed assets. The sum of current assets and fixed assets of a company represents the total assets of that company. On the right side of the balance sheet, it shows the source from which the company acquired its assets. Short-term debt refers to the debts that a company must pay within a maximum of one year, long-term debt refers to a company's debts with a maturity of more than one year, and equity refers to the remaining balance of a business after deducting its short-term and long-term debts from the total assets. The sum of short-term debt, long-term debt, and equity also gives a company's total liabilities. In a balance sheet, total assets and liabilities must be equal.

Accounting of financial transactions of companies and their publication as financial statements are often not understood by people who do not deal with accounting. Let us clarify this issue here. When an account is debited according to the double-entry method, another account is credited. However, differentiating this often causes confusion. In the balance sheet, assets pay the remainder of the debt and resources the remainder of the receivable. Except for exceptional accounts. Now I'm making two magical sentences for you. Those who understand the logic of these two sentences will learn 50% of the accounting for Balance Sheet accounts.

"If there is an increase in any account from the asset accounts," DEBT "is recorded, if there is any decrease," RECEIVABLE "is recorded."

"If there is any increase in the resource accounts, it is recorded as" RECEIVABLE ", if there is any decrease it is recorded as" DEBT "."

With these two sentences, you can easily understand the accounting recording system in the balance sheet.

Income statement

Tables that show how much profit or loss an enterprise has made as a result of this, showing its revenues and costs within a certain period. If you want to watch a movie of a business, take a look at the income statement. A simple income statement is given below.

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You find the gross profit when you subtract the costs of the sales made by the businesses in a certain period of time. If you deduct the expenses of the managers who organize the business from the gross profit, the expenses made for the marketing of the products sold and the researches focused on increasing the sales, that is, you will find the operating expenses and the operating profit of the enterprises. If there is an expense outside of the operations of the enterprises, for example, interest expenses of the borrowed debts. When you subtract such expenses, you will reach the pre-tax profit. Since a certain part of the profit will be given as tax, the remaining balance will also be net profit. The main purpose of companies is to make profit. Therefore, any development that increases profit creates a serious earning potential in the stocks of public companies.

The more your net profit increases, the more your equity increases in the balance sheet. So either your debts decrease or your assets increase. These two results will lead to an increase in equity. If an enterprise's net profit and operating profit are in parallel with an increase or decrease, it creates a situation that increases the predictability in company valuations, as can be seen in our upcoming articles. In our next article, we will set up a raw meatball shop with you and make the opening balance sheet of this raw meatball shop. Then, we will explain the valuation methods and logic in a company through the raw meatball shop. In other words, we will expand our raw meatball shop and explain what the stock price should be.

(The reason we established a raw meatball shop is because I love raw meatballs so much: D)

AUTHOR:

Yilmaz Altun

“Investment information, comments and recommendations contained herein are not within the scope of investment consultancy.

Investment consultancy service; It is offered within the framework of an investment consultancy agreement to be signed between brokerage houses, portfolio management companies, banks that do not accept deposits and the customer.

The ratings contained herein are based on comments and personal opinions. These views may not be suitable for your financial situation and risk and return preferences.

Therefore, making an investment decision based solely on the information contained herein may not produce results in line with your expectations. "

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