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Getting Started With Accounting Basics

So you're starting a new business but don't have any accounting background whatsoever. There's no need to worry. Understanding the basics of accounting does not require an Einsteinish IQ. For the short of things, accounting is the process that involves the recording, categorizing, analyzing and reporting of financial information. Accounting procedures vary depending on how large your business is or how it is structured; but one thing is the same -- all companies require some way to keep track of their funds.

To avoid hassles, some firms just hire accounting experts to build and monitor their financial books. There are some that also use software that's widely available in the market, like CheckMark MultiLedger, MYOB Accounting and QuickBooks to keep their accounting records in check.

How does basic accounting work?

Accounting is all about creating balance between your debits and credits. Using a method called double-entry accounting, accountants normally make use of a ledger to record all the money, no matter how small, that goes in and out of your company. These numbers are written on a balance sheet, which can pretty much sum up your company's financial state. This basic equation is usually present in all accounting records:

Liabilities + Capital (equity) = Assets.

What does a basic accounting cycle contain?

Since accounting is a periodic activity, meaning, it happens either monthly, quarterly, biannually or yearly, depending on your needs, there has to be a set process to keep things running smoothly.

1. Recording - Enter data about daily transaction in sales, cash received and cash disbursed ledgers.

2. Post credit and debts in the general ledger - Keep your general ledger up to date by inputing all accounts payable, accounts receivable and equity and other expenses and accounts

3. Adjusting the general ledger - Not all ledger entries are carved in stone. There are items like accrued interest, taxes and bad debts that do not get recorded in daily journals. Adjusting the entries will help balance all expenses with revenues for every accounting period.

4. Close the books - After all costs and sales figures are accounted for, net gains should be immediately posted on your equity account. Before a new accounting cycle starts, costs and revenue should reach a zero balance.

5. Prepare and release financial statements - Companies come up with financial reports at the end of every accounting period, which contain statements of capital, income statements, cash-flow data, balance sheets and others, to sum up all the activity for the given period.

The key output of an accounting procedure is the financial statement. Businesses often use this to gauge how well their company is doing at present and how much they can afford to spare for expansions and improvements in the future. Financial accounting statements also help owners realize where to place lids on costs and when to start spending, based on past experiences. They also make it easier for businesses to qualify for loans, if ever they need one, and to report their financial standing to the IRS.

Khieng 'Ken' Chho is author and owner of Online Accounting Resources. For related articles and other resources, visit Ken's website: http://accounting.onew3b.net (parked domain)

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