Accounting
Accounting is one
of the basic courses for business students and each and every business student has to
know about basics of accounting. But even today people misunderstand accounting
as being a field which has something to do with numbers only. But the
definition of accounting also includes something out of recording transaction
and calculating profit for a business. Actually accounting is a long process
which starts from recording each and every transaction and ends with submitting a
complete accounting report for any specific time period to the management of
an organization. The main objective of accounting is to provide information to the
higher authority of a business to help them make correct decisions based
on information given.
Accounting Basics
Following are few
accounting basics that you should know as a business owner or business student-
Accounting Process
Accounting process
or accounting cycle has a total of eight stages which flow sequentially.
Following are the stages-
1. Identifying
transactions from all business events. Only events that consist of some money
exchange are regarded as transactions.
2. Recoding
transactions into Journal entries. According to double entry bookkeeping
system, every transaction affects at least two accounts; one debit and one
credit.
3. Making Ledgers for
each and every account from journal entries.
4. Creating
preliminary Trial Balance from Ledgers to check errors.
5. Making adjustment
journal entries and ledgers for transactions which were not included before.
6. Creating an
Adjusted Trial Balance from adjusted transactions.
7. Making financial
statements like Income Statement, Balance Sheet, Stockholders' Equity Statement, Cash
flow statement Etc. based on Adjusted Trial Balance.
8. Making accounting
report for an accounting period and presenting that to the management.
Accounting Vs. Bookkeeping
People sometimes
use both these words interchangeably. But they are not the same. Bookkeeping is
just a part of Accounting which is to record financial transactions. But
accounting is a long process of recording transactions, making financial
statements and making and presenting financial report. So, bookkeeping is only
a part of Accounting.
Financial Statements
In Accounting, there
are a total of four financial statements; Income Statement, Balance Sheet, Cash
Flow Statement and Stockholders' Equity Statement.
Following are brief
descriptions of these financial statements-
Income Statement:
Income Statement is one of the main statements of a business. The main purpose
of preparing this statement is to know profitability of a business. An income
statement is always made for specific time period. There are two sides of an
income statement; Expenses and revenues. If revenue is more than expenses, its
balance is net income. But if expense is more than revenue, its balance is net
loss.
Balance Sheet:
Balance Sheet is made based on basic accounting equation that is-
Assets=
Liabilities+ Owner’s Equity
A Balance Sheet
tells about the company’s position on a certain date. You can find company’s
total assets, total liabilities and owner’s equity. Like income statement, Balance Sheet too has two sides. We can see in the above equation that Assets
are on one side and liabilities and owner’s equity on the other.
Cash Flow Statement:
Cash Flow Statement is prepared to know the amount of cash in hand in a business. It tells you about
uses and sources of cash during a specific accounting period. Again, it gives
some important information about firm’s investing and financing activities in
that period. There are two types of
accounting basis; Accrual Accounting and Cash Accounting. In Accrual Accounting
both cash and on account transactions are counted. But in cash based accounting
only transactions with exchange of cash are counted. Cash flow statement is made using cash based accounting.
Owner’s Equity Statement:
Owner’s Equity Statement shows the portion of total assets of the company that
the owner/s own/s. Basically deduction of total liability from the assets gives the
amount that owners own.
Each and every
business needs accounting for its smooth operation. Businesses need to know
about accounting, basic accounting cycle and prepare financial statements to
check its profitability and financial position.
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