Accounting Basic - What is Accounting?
By Ana Orwel
Accounting is the use of a system of terms, formulas, and other record-keeping devices
that allows businesses to calculate, track, and compare their financial growth, or recession
in some cases. The basic concept of accounting, the accounting equation, involves recording
and calculating assets of the business, liabilities, and equity. That way, financial status
of the business can be assessed and understood quickly and easily. Other more in-depth concepts
involved in accounting include handling investments, payroll, and auditing for the business.
Accounting is an educational discipline
It is taught in most colleges and universities and even in some technical school and
high-school classes. There are several levels of degrees, specialties, and government-required
licenses that someone can, or must, acquire within the discipline of accounting. Accounting
has been taught and practiced as a discipline for centuries, and it continues to evolve as
practitioners and researchers of accounting encounter ever-changing business, financial, and
legal issues.
Depending on how a person intends to be involved in the accounting of a business,
he or she should receive some sort of training in accounting practices. For example, accounting
for big businesses may require whole departments or teams of professional accountants. On the
other hand, someone simply wanting to keep track of the finances of his or her part-time business
could handle the accounting with a basic knowledge of accounting concepts and formulas.
Accounting is a necessary part of any business success
Accounting gives business executives a way to evaluate the financial status of the business.
With this financial information, executives can compare the financial status of the company
to previous fiscal periods or years, set realistic goals for future fiscal periods or years,
and make decisions that depend on or have an affect on the finances of the business.
Also, accounting reports inform business stock-holders and employees and the general public about
the financial status of the business. In fact, all businesses are required by law to file some
sort of accounting reports to the IRS and⁄or other government and financial entities. Auditing,
internal or external, is an important function of business. Having sound and efficient accounting
practices will ensure a successful audit.
Accounting Basic - What is the Accounting Cycle?
The accounting cycle is the series of steps that take place in order for financial statements
to be accurately and uniformly produced at the end of an accounting period which is typically
the length of one month, quarter of a year, or a whole year. Below is a list of the steps you
would take to complete the accounting cycle, listed in the order that you would perform them,
and with a brief summary of each step.
1. Identify the transaction. This transaction could be the revenue from the sale of a
product or a payment to another business for services.
2. Analyze the transaction and how it related to the accounting balance sheet. For example,
determine which accounts are affected by the transaction and how they are affected.
3. Record the transaction to a journal such as a sales journal. Journals are kept in
chronological order and may be updated continuously, daily, or however often it is necessary.
4. Record the transaction to the general ledger. Take all of your entries and categorize
them by the account.
5. Perform a trial balance. Debits and credits need to be equal at the end of an accounting
cycle, so calculate the entries to ensure they match.
6. Prepare adjustments. Just because entries are recognized, does not mean the work has
been performed. Revenue can only be recognized when the work has been completed, so adjust
the entries accordingly.
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