The Accounting Triangle is a way to progressively grow your mastery of accounting building blocks. These are the things that you absolutely must know! Your starting point is to draw and label the triangle below. Remember this sufficiently well so that you can replicate it any time you need. Draw and label it again later today and then tomorrow. You should have the hang of it by then. We are going to build you knowledge of each of the four areas identified.
The Accounting Triangle gives you the language skills to remember the more advanced elements of accounting. When you master the material in the Accounting Triangle you have the vocabulary to understand the language of business.
We will start with the Accounting Equation. It is the foundation of accounting. When you have mastered the Accounting Equation you are well on your way to succeeding in accounting.
1. Accounting Equation:
The basis upon which the patterns of record keeping are built. Basic Accounting Triangle - A=L+OE. Expanded Accounting Triangle expands Owners Equity into its two components. The Capital Account (the Permanent Account) and Retained Earnings (this is all of the temporary accounts).
2. Accounting Cycle:
Transactions are recorded in a Journal, posted to the ledger, summarised in the Trial Balance and Reported in the Financial Statements.
3. Principles: Accounting and Reporting.
Accounting Principles deal with measurement and context. Reporting Principles provides the guidelines for how information is reported to users.
4. Basic Pattern:
A system is the most basic pattern we come to understand. The elements of a system are Input, Process and Output. We represent this in its basic pattern form of Opening Balance Plus Additions Minus Subtractions Equations Closing Balance. Where the Opening Balance is equivalent to the Input and the closing balance is equivalent to the Output. The process is made up of the additions and subtractions. We also need to know how to reorganise these various parts.
Layers of the Accounting Triangle
The Accounting Triangle is a mechanism for you to remember these foundational elements and it has layers of complexity. You master the basic layer and build on this layer to form a more complex layer. The Diagram is the basic layer. The next layer of complexity is 1,2 3 and 4 above.
Stored in your head.
The idea of the Accounting Triangle is that you store it in your head so at any time you can reproduce it on paper. Start by drawing the diagram above. Then add the two levels of the Accounting Equation and then the Stages of the Accounting Cycle.