The Fundamentals of Accounting

What is the first thought that comes to mind when you are having a conversation about the field of Accounting

? When I think of Accounting I picture a guy in a suit, sitting in his office with his head down pulling his hair out due to frustration. Most people think of accounting as only crunching numbers and that is it. Yes of course that is part of the job but believe it or not Accounting is a lot more than that and in some aspects can even be exciting. In order to know if you would be interested in the accounting field you must learn the fundamentals or the basics of the whole concept.

To start off one must memorize the basic equation that lays down the foundation for accounting and that is that Assets = Liabilities + Owners Equity. This equation is broken down into three parts assets are any economic resource that have monetarial value to the owner. Examples of this can be land, furniture, cash, house, personal bank accounts, and any other items that have value. A liability is any debt you may have, meaning any money that you owe to a person or company. Corporations also have liabilities and they are recorded as a loss on the balance sheet. Owner's equity is the difference between your assets and your liabilities. This is where you understand what your net worth is, meaning whether you are losing money or making money. When corporations continue to be on the negative side and have a net loss year in and year out, they eventually go out of business.

A Balance sheet is a financial statement that depicts a company's assets, liabilities, and equity at a given time. Business have their accountants do balance sheets periodically throughout the year whether it be every three or six months or sometimes on a weekly basis. It gives them a general idea of whether the company is making or losing money by subtracting their total assets from their total liabilities to achieve their net gain or net loss. A balance sheet always has the assets listed at the top with their personal value for each one to the right and at the bottom we list the total assets. You do the same thing for the liabilities and list that total at the bottom of the column. Then you subtract them and you write in your net value and place your equity beneath that.

The Income Statement is another basic financial statement that shows the company's revenues and expenses over a given period of time. This financial statement also shows whether the company made a profit or a loss over that given period of time. You retrieve the net loss or gain from the previous financial statement; the balance sheet and record it on the income statement in the proper position. Accountants generally do income statements quarterly throughout the year for shareholders of the company to see whether the company is making or losing money. In order to create a balance sheet you simply list all of your revenues at the top and then list the total at the bottom. Next you list the total cost of sales along with the gross profit, and then you list all of your expenses and total that at the bottom. After you do all of the following you record your net gain or loss appropriately.

The third and final basic accounting financial statement is the statement of cash flows. This is a financial statement that shows the amount of cash earned by a company and also the amount of cash they spend in a given period of time. The statement of cash flows illustrates a company's financial strength and its ability to generate enough cash to keep the business running efficiently. It is important for accountants to keep up on the cash flow financial statements because it allows you to see whether the business has enough money for their liabilities and enough to pay their employees the amount they earn. A cash flow statement has three main categories operating activities, investing activities, and financing activities. Each category is than followed by cash received and cash used column with line items filled appropriately, with the totals recorded at the bottom. At the bottom of all of this you record whether your cash has a net increase or a net decrease after you total up all the columns.

Those are the basics of accounting along with three financial statements they one must need to know how to do in order to even think about being in the accounting field. I hope that my article was informative and can give one a better understanding of the basic concepts of this field. This should give you an idea of whether you are interested in the accounting field or if it is not for you.

The Fundamentals of Accounting

By: William Kane

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