What Is Accounting Anyway?
Picture: Accouting business |
What Is Accounting Anyway?
Anyone who's worked in an office at some point or another has had to go to accounting. They're the people who pay and send out the bills that keep the business running. They do a lot more than that, though.
Sometimes referred to as "bean counters" they also
keep their eye on profits, costs and losses. Unless you're running your own
business and acting as your own accountant, you'd have no way of knowing just
how profitable - or not - your business is without some form of accounting.
No matter what business you're in, even if all you do is
balance a checkbook, that's still accounting. It's part of even a kid's life.
Saving an allowance, spending it all at once - these are accounting principles.
What are some other businesses where accounting is critical?
Well, farmers need to follow careful accounting procedures.
Many of them run their farms year to year by taking loans to plant the crops.
If it's a good year, a profitable one, then they can pay off their loan; if
not, they might have to carry the loan over, and accrue more interest charges.
Every business and every individual needs to have some kind
of accounting system in their lives. Otherwise, the finances can get away from
them, they don't know what they've spent, or whether they can expect a profit
or a loss from their business.
Staying on top of accounting, whether it's for a
multi-billion dollar business or for a personal checking account is a necessary
activity on a daily basis if you're smart. Not doing so can mean anything from
a bounced check or posting a loss to a company's shareholders. Both scenarios
can be equally devastating.
Accounting is basically information, and this information is
published periodically in business as a profit and loss statement, or an income
statement.
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Basic Accounting Principles
Accounting has been defined as, by Professor of Accounting
at the University of Michigan William A Paton as having one basic function:
"facilitating the administration of economic activity. This function has
two closely related phases:
1) measuring and arraying economic data; and
2) communicating the results of this process to interested parties."
As an example, a company's accountants periodically measure
the profit and loss for a month, a quarter or a fiscal year and publish these
results in a statement of profit and loss that's called an income
statement.
These statements include elements such as accounts
receivable (what's owed to the company) and accounts payable (what the company
owes).
It can also get pretty complicated with subjects like
retained earnings and accelerated depreciation. This at the higher levels of
accounting and in the organization.
Much of accounting though, is also concerned with basic
bookkeeping. This is the process that records every transaction; every bill
paid, every dime owed, every dollar and cent spent and accumulated.
But the owners of the company, which can be individual
owners or millions of shareholders are most concerned with the summaries of
these transactions, contained in the financial statement. The financial statement
summarizes a company's assets.
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A value of an asset is what it cost when it was first
acquired. The financial statement also records what the sources of the assets
were. Some assets are in the form of loans that have to be paid back. Profits
are also an asset of the business.
In what's called double-entry bookkeeping, the liabilities
are also summarized. Obviously, a company wants to show a higher amount of
assets to offset the liabilities and show a profit. The management of these two
elements is the essence of accounting.
There is a system for doing this; not every company or
individual can devise their own systems for accounting; the result would be
chaos!