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Accounting Essentials: 9 Facts You Should Know About Accounting

  • jrkarimsayed
  • May 23, 2022
  • 4 min read

When it comes to business, most people have a general idea of what accounting entails. You probably understand that accountants analyze financial statements, check expenditures, and so on. However, unless you’re in the business world regularly or have aspirations to be there one day, you may not know the specifics of accounting as they relate to business. Accounting is a broad field with many subspecialties. It can be complicated and confusing for those who aren’t used to dealing with numbers on a regular basis. But understanding the basics of accounting can help you in your career as well as your personal life. If you own your own business or are thinking about starting one, knowing these nine essential facts about accounting will prepare you for success.


The Purpose of Accounting

Accounting is the process of tracking and analyzing financial transactions related to a business or organization. It can be used for government, nonprofit, and for-profit organizations. Accounting is used for a number of purposes, including financial reporting, budgeting, planning, and management. Financial reporting refers to the communication of financial information to shareholders, investors, and other stakeholders. This includes information about a company’s assets, liabilities, profit and loss, cash flow, and more. In order to make informed financial decisions, people need relevant financial information. Accounting provides this by gathering, analyzing, and communicating financial data. Also, accounting is used to make informed business decisions. It can be used to create budgets, forecast future expenses, and implement cost-saving measures. Accounting can help to track and forecast cash flow, which is essential to any business.


Bookkeeping and Financial Statements

Bookkeeping and accounting have a bad reputation. In movies and on TV, bookkeepers and accountants are portrayed as boring numbers people who lack personality and are a little bit dull. While this may be true for some, many in the accounting profession are energetic people who love what they do. They are data-driven individuals who want to understand how money moves through a business. In fact, bookkeeping and accounting are essential to every business. Bookkeeping is simply the daily recording of financial transactions. The bookkeeping process is straightforward. You record a transaction, like paying a supplier or purchasing new equipment, no matter how large or small. Then, you record the receipt of payment and how the money is used. Financial statements are accounting summaries of the financial transactions that have occurred over a set period of time. These include balance sheets and income statements.


Understanding Financial Statements

When you look at a company’s financial statements, you can determine its current financial health, as well as predict its performance in the future. Financial statements — like the balance sheet and income statement — are organized in a certain way to help you interpret the data. Understanding the standard organization of these statements will help you make sense of them. - The balance sheet shows the financial position of a company at a specific point in time. It lists the company’s assets, liabilities, and equity. The assets include money that’s available for use, like cash, accounts receivable, and inventory. Liabilities are debts that a company must repay, like outstanding loans and unpaid taxes. Equity refers to the company’s net worth. It represents the difference between assets and liabilities. - The income statement gives a picture of the company’s financial performance over a specific period of time. It shows gross revenue, expenses, and net profit. Gross revenue refers to the total money that comes into a company during a specific period. Expenses are amounts that are spent during that same period. Net profit is the difference between gross revenue and expenses.


Double-Entry Accounting

Double-entry accounting is the foundation for all financial statements. It’s an accounting method that records every financial transaction twice. Once each transaction is recorded, the totals are added together. The idea is to ensure no transaction is overlooked. There are two sides to every transaction. For example, when you buy a new computer for your office, that computer is an asset. Meanwhile, you must pay cash for it. This is a liability. If you don’t record both sides of the transaction, you won’t be able to see the full picture. This can make it difficult to manage your finances.


Accrual Accounting vs. Cash Accounting

There are two main types of accounting: accrual and cash accounting. Each has its benefits and drawbacks. Each is also used primarily for certain industries. Accrual accounting records financial transactions when they occur. For example, if your company orders $1,000 worth of inventory, you record that transaction as $1,000 even though you haven’t yet paid for the items. This is because you know you will pay the money eventually. Contrary to what many people think, accrual accounting does not involve forecasting or guessing how much money the company will make. Rather, it records transactions when they occur, even if there’s no money involved. Cash accounting records financial transactions when money is exchanged. In our example, your company would record a $1,000 expense when it pays the supplier. Cash accounting is the most straightforward method of accounting. It simply records transactions when they happen.


Audit Basics

Accounting professionals are tasked with ensuring financial records are accurate. They are responsible for auditing financial statements to ensure they are correct and complete. Their goal is to find any irregularities or inaccuracies. These might include underreported sales, incorrect inventory amounts, or overstated assets. In the United States, an independent audit is required for public companies. These are companies whose stocks are traded on a stock exchange, such as the New York Stock Exchange. Public companies are required to provide an annual report to shareholders. This report includes audited financial statements.


Take-Away Lessons

Accounting is the process of tracking and analyzing financial transactions related to a business or organization. Financial statements are accounting summaries that provide a snapshot of a company’s financial health. Double-entry accounting is the foundation of all financial statements. There are two main types of accounting: accrual and cash accounting. An audit is an independent review of a company’s financial records to verify accuracy.

 
 
 

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1 Comment


Unknown member
May 24, 2022

Hi, I am trying to learn finance to move into finance corporation. I love that your blogs are very simple to understand for beginners like me.

Keep up the good work!


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