Accounting Basics involves the process of reporting and documenting company financial transactions. This process is carried out by a variety of professional accountants who have earned their stripes in the field and are expected to know all about accounts and tax codes. The need to keep track of all financial transactions that take place in the company is paramount to the survival of the organization. It is in all probability one of the most important functions in any business organization. The following discussion of accounting basics needs to provide you with a firm foundation from where you can know exactly how an accounting procedure works and how it is applied to produce financial reports.
Accounting Basics first make sure that all financial transactions and obligations of the organization are recorded in the company’s books and secondly, the financial position is evaluated at regular intervals. This evaluation is done by the accountant by way of assessing the capital assets, current and short term liabilities, ownership equity, net worth and other financial factors. When the accountant concludes that a change in the financial position is required, he will prepare and file the financial statement that will go a long way to reveal the nature of the change and its impact on the income statement. Some of the most common financial statement categories are profit and loss statement, income statement, equity statement, and statement of cash flows.
Another very significant aspect of accounting is the preparation of financial statements to be provided to external stakeholders such as investors, regulatory authorities, banks and other external parties. The significance of these statements depends on the requirement of the company. There are many methods by which these statements are prepared. In order to prepare accurate financial statements for external stakeholders, the accountant must have a strong knowledge base in accounting. A comprehensive set of accounting policies and guidelines should always be in place for ensuring compliance with accounting laws and regulations.
Accounting involves complex and interrelated concepts and processes. This means that even a basic accounting concept can become complicated and obscure over a period of time. The number of techniques and strategies used in the calculation of financial statements and data may also increase over a period of time. Some techniques and strategies are very regular while some are less regular; therefore they could potentially impact the presentation of the financial statements and data. Some of the basic accounting concepts that are commonly adopted include the day-to-day transaction, the income statement, balance sheet, and the statement of cash flows.
A day-to-day transaction is any transaction in which the value of a product or service can be transferred between the seller and buyer on the same day. Examples of such transactions are sales order, stock exchange trade, rent collection, lease purchase, repurchase, and loans. The income statement reports the income from the sales of products or services and the balance sheet reports the difference between assets and liabilities. The balance sheet accounts for the difference between financial position. Balance sheet accounts for the assets and liabilities of the business, and it provides information about the company’s current financial position.
Cash method is an accounting technique that uses bank accounts to record cash payments. This technique is sometimes called the cash method because it uses bank account information to track the payment of expenses, rather than the more familiar financial records of accounts receivable and inventory. Expense account is an account that reports the cost of goods sold or delivered as an itemized deduction. Good books would include information on the cost of goods sold, items bought, manufacturer price, selling price, gross margin, and tax. An important factor to consider when using the cache method is that all expenses reported must be itemized; therefore, the total income will be different from the net income, which excludes the expenses that are not reported.