Everyone who has worked in a business or at an office has been in touch with the accounting department at one point or another. They're the financial experts who pay and send out the bills that keep the business running, but they do a lot more than that. They also monitor income, revenue, expenses, profits and losses. If you're running your own business and acting as your own accountant, you'd have no way of knowing just how profitable, or otherwise, your business is without some form of accounting.
No matter what business you're in, even if all you do is balance a checkbook, that's still accounting. Deciding whether to immediately re-invest your money to grow your business or to save it - these are also accounting principles.
What are some businesses where sound accounting practices are critical? Well for example, small business owners need to follow careful accounting procedures. By way of example, a small business may decide that they need to take out a line of credit in order to launch a marketing campaign. If their marketing campaign brings in a lot of new customers and it's a profitable year, they can pay off their loan right away; if not, they might have to carry the loan over, and accrue more interest charges.
All people and every company requires some kind of accounting structure. If you did not have some kind of organized accounting system, you would have no idea of your ongoing expenses and whether you should expect to turn a profit or if you are facing a deficit in your spending. Keeping track of your accounting, whether for your own personal expenses or if you are running a multi-million dollar company, is an extremely important process. Failing to keep a close eye on your financial situation could mean anything from bouncing a check, all the way up to running the risk of going out of business. Clearly any such scenarios can have serious consequences.
Accounting is basically information, and this information is published periodically in business as a profit and loss statement or as an income statement.
Accounting Practices
A good working definition of accounting is that it has the purpose of 'improving the management of financial activities'. This definition has two closely connected concepts: displaying financial information; and communicating the consequences of this analysis to the business owners.
For example, a company's accountants periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss that's called an income statement. These statements include elements such as accounts receivable (what's owed to the company) and accounts payable (what the company owes). Of course, actual accounting processes can be much more complex than this with topics such as retained earnings and accelerated depreciation which are more advanced stages of accounting.
However, much of the day-to-day accounting practices are concerned with the central role of bookkeeping. This is the process that records every transaction; every bill paid, every cent owed, every dollar spent and accumulated.
What is of the greatest interest to the company owners or to the shareholders are the summaries of these transactions illustrated by the overall financial statement. The financial statement summarizes a company's assets. The value of any given asset is calculated by its price when it was originally bought. Another purpose for the financial statement is to indicate the source of all the company assets. Some assets are in the form of loans that have to be paid back. Of course, the profits of a business are one of its greatest assets.
In double entry bookkeeping the liabilities off the company are outlined. Obviously, a company wants to show a higher amount of assets to offset the liabilities and show a profit. The administration of these two core components is the very heart of the principles of accounting.
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Brought to you by Eakins & Company, Castle Rock, CO - Bookkeeping. You might also want to check our our current Accounting related articles on our blog at: Eakins & Company Castle Rock, CO - Bookkeeping .
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