Accounting is the language of business. It’s how a business “keeps score”. It is defined as the art of recording, classifying, and summarizing financial transactions and events. It deals with interpreting and communicating information about business operations and finances.
Accounting is extremely important to any business because the financial information allows business owners to make informed business decisions. Whether managing a business, investing money, or just deciding how to spend and budget finances, everyone works with and uses accounting ideas.
In order to know how to keep track of their “money” in the business and how it operates, business owners need to understand what accounting is, how accounting works, what debits and credits are, what journals and ledgers are, what a balance sheet is, what an income statement tells, and what an accounting data reveals.
Do you want to know just how well you are doing in operating your business? Do you want to make better business decisions? Then learn to “keep score” by learning and understanding the basics of Accounting.
What’s Accounting About?
It is not just about mathematics, it is more than counting business. Accounting is “keeping score” … it is about “tracking stuff”. What score? What kind of stuff? How does one understand the basics of accounting?
Accounting is about concepts. They are not complex principles; rather, they are simple and effective ways to track a business. Business owners should understand this basic accounting equation :
ASSETS = LIABILITIES + OWNER’S EQUITY
Assets refer to all the “stuff” that the company keeps
Liabilities refer to the “stuff” that belongs to others
Owner’s Equity or Capital refers to the “stuff” that belongs to the owners
Stuff the Company Keeps = Other People’s Stuff + Owner’s Stuff
From the business owner’s point of view, the stuff that he owns equals the total stuff that the company keeps minus the stuff that belongs to other people.
OWNER’S EQUITY = ASSETS – LIABILITIES
The company’s assets, liabilities and capital (owner’s equity) are all presented in a Balance Sheet, a report that shows their details and composition so that the viewing public can keep track of all the stuff.
Accounting keeps score of the business by recording, classifying and summarizing all business transactions and events. It is then presented in a report called the Income Statement which contains the details of the company’s sales revenues and all related costs and expenses. The results of the company’s operations refer to Net Income (or Net Loss).
SALES – COSTS & EXPENSES = NET INCOME
Should the costs and expenses exceed the total sales, the operations will result to Net Loss.
Keeping score, tracking stuff … these are the basics. But there are more areas of activities in Accounting. There are financial concerns, management concerns, audit concerns, tax concerns, fund concerns and more.
Learning the basics is just an introduction to A-Counting Biz.