The Simplicity of Accounting

Organization and attention to detail are two key elements involved with keeping financial records

. Young adults generally will only check their bank account balance online or at ATM rather than keep records of their monetary transactions. At an early age, I showed these aspects in how I saved up my weekly allowances and eventually my salary from my first few real' jobs. Checkbooks were useful in keeping track of my finances but never allowed me to see the full spectrum of how I was using my money. During my college sophomore year, I decided to become a business major so hopefully I could further advance my knowledge on general finances and also because it seemed logical to understand the basics of the business world. Financial accounting was not only the most useful class I have participated in so far, but also the most interesting. The financial statements, such as balance sheets and income statements, were some of the easiest concepts for my mind to grasp and it shocked me how much of the same practice I already employed in my daily life.

The main equation of financial accounting shows how liabilities, in addition to equity, equal a company's general assets and each category breaks down into smaller, more detailed pieces of information. Assets consist of property a business owns or invested in, cash on hand, resources used in production, and debt that is owed to the business, also known as Accounts Receivable'. Depreciation, which is used to show the decreasing value of an item that will not last forever, is also an asset along with prepaid expenses. Debits increase an asset while credits have the opposite effect. Obligations that a company owes others are recorded under liabilities.Credit transactions a business incurs with purchases, loans, or interest are a few examples of a common liability. This practice seems amazingly simple to me, although it is very easy to find everyday people who forget their financial debts to others because they refuse to organize their transactions, hence the horrible reputation Americans have with credit cards. Since liabilities and equity are on the opposing side of the financial equation, they're decreased by debit and increased with credit. Equity, or Owner's Equity, is considered the value' of a company because it is made up of common stock a company owns, retained earnings, revenue and expense. This account can be increased with revenue, such as net income increasing, or decreased with expenses. Once a company organizes all of their transactions into these main and sub accounts, the next step is to compile a balance sheet.

As opposed to recording an entire year's worth of financial transactions, balance sheets generally show a business's immediate financial position. If the date on the balance sheet stated "Nov. 30th, 2010" it means all transaction through that date are recorded and organized. This financial statement allows possible investors and/or creditors to view the current debts and credits within a company. Each main account, Assets and etc., are subtotaled then liabilities and equity must equal the subtotal of Assets. If they are not equal, the person in charge must back trace their steps to find either an accidental or fraudulent error.

Before the actual balance sheet is created, an income statement is formed to show revenues and expenses involved with the company and find out the net amount'. Revenues are when a company makes or earns a sale while expense is the documentation of expenses that occur to maintain revenue. To find the net amount, you must subtract net revenue with net expenses. If the net amount is negative, it means there is a net loss' for the company and expenses were too high to end up with profit. A positive net amount means a net income' for the company and is important to keep if the business wants to function profitably. Once the income statement is assessed, it in plugged into the balance sheet under Retained Earnings' and total equity can be calculated.

Now that I have learned how to truly document my financial obligations to others, along with how to maintain a positive balance in my bank account while between jobs or in school, I feel more capable to live on my own after college. Out of any class a campus could offer, I believe accounting is the most useful for students who are just learning how to spend and save their money. Our economy would flourish much more if everyone was taught the basics of accounting.

The Simplicity of Accounting

By: Rachel

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