The Importance Of Basic Accounting Concepts

Even basic accounting concepts may drive the smartest people to lunacy. Proper accounting is crucial in a business for several reasons. Proper accounting can keep track of cash flows and stockholders’ equity. These financial reports can determine the status of a business. They can tell business owners whether or not they are making money or not. They can also help fill-in tax returns and keep everything in proper order.

Accounting concepts are required to study accounting systems. There are three parts to any accounting process. These include the journal, the general ledger, and subsidiary ledgers. These can help business owners determine which direction to take their company.

The Journal is where individual transactions are recorded and entered. Most businesses have a number of journals, each covering a different kind of transaction. This helps keep the numbers in a line and organized. Transactions can be classified under a number of different types. These types include cash receipts, purchases, sales, or cash disbursements. Once these are organized within their respective journals, they are then entered into the general ledger.

The general ledger further divides these entries into three categories. These categories are liabilities, assets, and capital. This allows the accountant to get a clear idea of the account balance. This allows them to write-up a financial report.

The subsidiary ledger provides substantial information on each transaction. This information could not be put into the other ledgers because of space constraints and efficiency concerns. This includes the demographics involved in each type of transaction. This is important for a number of reasons, from billing purposes to market research.

Accounting is all about understanding credit and debit. These two concepts are the foundation of all accounting. Debit is always transcribed on the left side of the sheet, while credit is always on the right side. Income is recorded in the ledger as credit. Costs, expenses and assets all count as debit. Liabilities count as credit. Everything must add up to the same amount on both sides. Most people get stuck on this concept, but it is the iron law of accounting. All of these things must add up to the same thing on both sides.

There is an easy way to account for everything. It involves the “General Accounting Equation”. Assets are essentially the sum of equity and liabilities. Assets are things that have a value that the company has. Liabilities are things that generally cost the company money or things that they own. The equity of a company is its net worth. This value is affected by any debt the business may owe.

Accounting is a difficult task. Just like other forms of math and science, most people do not need to be experts, but a little goes a long way. However, for businesses, it is best to have an expert involved rather than someone who just has a passing knowledge of accounting. Business owners might find it worthwhile to learn some advanced accounting to make sure that their accountants are not stealing from them. This can help keep the money secure.