subject: Account me in! [print this page] Account me in! Account me in!
Account me in!
Accounting involves the numbers behind a business. Through the numbers gathered, we can tell how the business is doing and how important everyday decisions are made. Without accounting, a business would not know what it owns. The company would also be unsure about its performance, and what the future holds. In other words, accounting is a crucial element in business. Because its so valued, the accounting profession has its fair share of challenges. Getting qualified takes many years and a lot of hard work. It is also important for every business owner to has some basic accounting knowledge. This will help give the company a sense of direction, and a more in-depth understanding on the numbers behind a business. There are a lot of key connections one can make just by looking at the statements. The basic statements include the balance sheet, income statement, cash flow statement, and statement of retained earnings. Its my intention to take the reader through these essentials.
The balance sheet has three sections. Assets, Liabilities and Shareholder's equity. Typically, the first thing anyone needs to know is that ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY. This is a fact and for the balance sheet to hold true this needs to happen. If the equation doesn't hold true, then a vital piece of information is missing. The equation can be manipulated to isolate liabilities or shareholders' equity. It is important to understand what belongs in each section. Assets are what a business owns. What is valuable to a business, this can involve goods that are tangible or intangible. A factory building would belong in this section, money that is owed to the business would classify as account receivables. Assets are bought and sold by a company everyday, which means the items on a balance sheet can liquidate.
Liabilities is basically what the company owes other parties. Any debts or bonds that need to be paid off. Liabilities could be in the form of loans, or even accounts payable. Having too many liabilities can cause a lot of problems for the company, as these are considered to be debts owed to others. Shareholders' equity is the amount financed through shares, shares that belong to the owners of the company. This could be in the form of share capital. Shareholders' equity is a great indicator of the future growth for a company.
Now that we have considered the balance sheet, we would also need to look at the income statement. The income statement is a simple document that shows the amount of profits or loss a company is making. This is done through information on revenues and expenses. All the revenues are first listed, revenues that come from sales. Then all the expenses, examples of some of these expenses would be rent, electricity, etc. Once we minus expenses from revenues, we know the pre-tax income. The tax is applied appropriately on this to give a net income. This net income could be divided by the number of shares to give us the earnings per share.
The cash flow statement simply shows the daily transactions made in the company. It accounts for the money that goes in to the business, and money that goes out. The daily purchases made are tabbed, along with cash collected. The statement of retained earnings is a simple illustration of the money that is kept from the previous year. All the collected earnings are, accumulated, and represented on the statement of retained earning.
These are the general accounting statements. They are standard procedure for all businesses. They help because a company knows useful information behind the decisions that need to be made. At a more advanced level, we can build analysis. Analysis that involve ratios and indicators to help make predictions. Thus, accounting acts as a foundation for many financial analysts and forecasters. It helps create certainty during uncertain times. The company knows where its heading, and the actions that need to be taken in both the short run, and the long run.
