ACCOUNTING BASICS

myhomeamericaIn every society where there is exchange of commodities whether physical goods or rendered services, money is always required before any transaction can be completed. Whether it’s a school, hospital, bank, or a local shop around the corner, money is always involved. Since money is involved, there must be an account of how the money is spent. Apart from money, other resources such as time and personnel can also be accounted for. Every asset in the workplace must be accounted for or else it will be mismanaged. In fact no business activity can last for long without a proper account of how the resources of the business are being used. Accounting is surely the language of business. It is an important activity in almost every business organization as long as resources are moving in and out. By now we should be ready to give a formal definition of what accounting in business means.

Accounting is the process of recording and analysing the financial transactions of an organization in an attempt to establish the company’s financial position at any point in time.

The word financial is used because accounting is more focused on money even though other things can be accounted for. However it is important to note that every asset in any establishment such human labour, machinery, building or time, all translates to money. When no monetary value is placed on these items, they are no more than useless. Accounting is heavily centred on creating substantial information about money; one that can be used to tell if a business is doing well or not.

Although accounting is very common, it is often misunderstood. The conception held by most people is that the field is only concerned with crunching numbers-addition, subtraction and stuffs like that. While all these are part of what accountants do, accounting involves a lot more than numbering or business arithmetic. It is an enjoyable field that involves a lot of controversial issues beyond number crunching. Many accountants hold the view that personal skills are necessary for progress. Thus apart from technical requirement, accountants are expected to be judgemental in performing their duties. Sometimes they have to make educated guesses and estimates in order to produce efficient results.

Financial accounting plays a crucial role in both the private and public sectors of any economy. It is the field that drives other fields whether profit or non-profit as long as there is a transaction that involves money whether directly or indirectly. Every activity that involves the buying and selling of goods and services must be accounted for so that the company involved will know if they are making profit or losing. Some of the transactions that might appear on tax return include:

  • Debts owed by the business
  • Wages and salaries paid to workers (employees)
  • Allowances paid to employees
  • Record of goods sold to customers
  • Taxes on sales remitted to the government
  • Receipts of expenses made by the organization
  • Receipts of invoices from suppliers
  • Inventories
  • And more

All these transactions are recorded in an accounting system. An account is then made taken on individual item, whether they are expenditures, cash taxes, debts or inventories. Each of these items is recorded in a separate account.

There are certain accounting terms that are used in almost every accounting exercise; having a basic knowledge of these terms will facilitate your understanding of financial accounting.

Cash

This is the money available to the company. It could be held in a saving or checking accounts.

Inventory

A company’s inventory includes all the products that are yet to be sold. They are held in stock to be sold later to customers.

Equity

Equity refers to the business capital plus the profits made by the organization. It is usually available to the business owner(s).

Fixed assets

Fixed assets are assets that are not mobile. They are used by the company for a long time, e.g. building and machinery.

Accounts receivable

Accounts receivable includes all the sales that were made to customers on credit. A date is usually agreed upon when they will have to make payment.

Accounts payable

These include all debts owed by the company to suppliers and business partners.

There are other terms like revenue, income taxes, administrative and accruable expenses which you have probably come across at one time or the other.

There are two methods of taking accounting information. It is either with accounting software or a journal. All the accounts of the company are usually stored in a ledger. It is from this general ledger that all financial statements are made. Examples of financial statements include balance sheet, income statements, cash flows, disclosures and so on. Since this is an introductory text, we will not be looking into all these terminologies. By now you should have ground knowledge of what accounting is all about.