Don’t have any knowledge Accounting or Bookkeeping? If not, read it.
Accounting is the process to record the transactions in a financial book. On the other hand, it is a system to process identifying, recording, measuring, classifying, verifying, summarize the transactions. In the broad sense accounting basics familiar to you some basic accounting terms like as basic accounting basic and principle, accounting basic and concepts, and accounting language. If you introduce with some terms of accounting than you will easily navigate through the explanations and other concepts of accounting in my blog.
Some basic that you will learn about revenue, expenses, assets, liabilities, income statement, balance sheet, and cash flow statement. You will also know the accounting debit and credit as you see the records of transactions. In fact, you will also see the two accounting principles, the matching principle and the revenue recognition principle; make sure that company’s income statement shows the company’s profitability.
Purpose of Accounting:
The purpose of accounting is to provide information to different users and the users make their decision based on the information. This is actually illustrated some definition which is made by accounting bodies.
According to A.W. Johnsons states that “Accounting may be defined as the collection compilation and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports and the uses of these reports for the use of these reports for the information and guidance management.”
On the other hand, there has another definition by the American Accounting Association (AAA) refers that, “Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decision by users of the information.”
In the above definitions accounting is the language of business. The basic purpose is to provide information to make a decision by users of accounting. If you want to more clear knowledge about the accounting learn the difference between accounting and bookkeeping.
Learn Accounting Basic Through a Story:
Now we can learn about how the basic accounting plays a vital role in a small business through a story which is fully my imagination. One day a rich man named John to think he will start his own business. He decides to open an e-commerce site and named the business is vendor store Inc.
He will go to his known law agency firm and describe his desire. The agency shares information which is needed to open a business like as various permit and governments identification numbers which are needed to start a corporation.
Mr. John is a smart guy and knowledgeable person to run his own business but he is struck to maintain his business transaction. He has no knowledge about an accounting. He decides to establish accounting software for the transaction in his business but he is confused about his idea. He is so much tense about it and goes to his old friend to discuss in this circumstance. His friend was a banker and he gives him permanent solutions to hire an accountant and suggest a name. Mr. John wants to know financial statement in his business and also he wants to ensure top rank in his business than the competitor.
Mr. John has arranged an interview and meet Mr. Jack who is an accountant as a said his old friend. In the first meeting, Mr. John asks the question how about the accounting software is needed in his business. Mr. Jack sees his business transaction is the high volume in a month and he suggested accounting software is needed to maintain the daily transaction. He states the Mr. John, accounting software is an electronic method to maintain transaction but on the other hand, you can record and maintain hard copy documents in an invoice as well as the voucher for the flawless financial statement.
What to do? Works and Suggestion:
John seems to be amazing in terms of his daily transactions. Jack is suggested 5 things to John which is given below;
- John has no doubt to start his business by invested his own money into it.
- In fact, the business has private firm so that the owner is all in one.
- The business will begin incoming fees and billing clients for delivering their product.
- The business will be collected the earning that were earned.
- The business will incur expenses in operating the business, such as a salary for Jack, advertisement, maintenance expenses.
Jack is a smart accountant to use accounting software because of he worked in a various small business like hundreds and thousands of transactions in a year in the beginning of the business. The accounting software is generated sales invoice and other accounting entries respectively. Prepare customer bills, write check, automatically up-to-date accounting records, and so on.
The daily transaction has occurred in the business and the transaction put into the software so the transaction made easy and simple for understanding to John. John seems happy with fast and easy access to specific information he will need to make a good business decision. The software is useful, reliable and informative for transaction approach.
Jack tells content and purpose of three main elements such as;
- Income Statement
- Balance sheet
- Cash flow statement.
Information of Financial reports which will want to users:
The financial reports state that different types of information of accounts which is given below;
- The companies earning is expressed as income and it is written done on the credit side of the accounts. On the other hand, each and every transaction of expenses is written down on the debit side of accounts in an income statement. When the income is deducted by expense is called net income.
- How many assets currently entities have? How many lend to others? How much money is left after the payment is made all claims? The first answer is the current entity assets. The second answer is liabilities of the company and the last is the capital of entities.
- The solvency states that, the ability to pay the claims like as outstanding and the ability to meet up short-term claims.
- The cash flow statement shows the cash inflows and outflows of the various activities such as operating activities, financial activities, and investing activities.
- The financial statement reflects the qualities, quantitative information of financial reporting to help the user make a sound decision.