Accounting Basics

Every individual and business needs some types of accounting system in order to keep track of what they have spent and to predict whether they can expect a profit or loss from their business. Basically, accounting is information published periodically in business as an income statement or profit and loss statement.

Much of accounting is also concerned with basic bookkeeping. Bookkeepers prepare what are referred to as source documents for all the operations of a business - the buying, selling, transferring, paying and collecting. They also make entries of the financial effects into journals and accounts. In addition, bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. Bookkeepers also compile complete listings of all accounts. The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized.

A balance sheet is a quick picture of the financial condition of a business at a specific period in time. The activities of a business fall into two separate groups that are reported by an accountant. They are profit-making activities, which includes sales and expenses. This can also be referred to as operating activities. There are also financing and investing activities that include securing money from debt and equity sources of capital, returning capital to these sources, making distributions from profit to the owners, making investments in assets and eventually disposing of the assets.

How is accounting used in business? Well, it's important to understand how the business makes a profit. A company needs a good business model and a good profit model. It's important not to confuse profit with cash flow. Profit equals sales revenue minus expenses. A business manager shouldn't assume that sales revenue equals cash inflow and that expenses equal cash outflows. In recording sales revenue, cash or another asset is increased. The asset accounts receivable is increased in recording revenue for sales made on credit. Remember that some budgeting is better than none. Budgeting provides important advantages, like understanding the profit dynamics and the financial structure of the business. It also helps for planning for changes in the upcoming reporting period.