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What Is Accounting and Its Principles

What Is Accounting Anyway?

Anyone who has  worked in an office at some point or another has had to go to the accounting department. They’re the people who pay and send out the invoices that keep the business running. But they do a lot more than that, though. Sometimes they are referred to as “bean counters” they also keep their eye on profits, costs and losses. Unless you’re running your own business and acting as your own accountant, you’d have no way of knowing just how profitable – or not – your business is without some form of accounting.

No matter what business you’re in, even if all you do is balance a check book, that’s still accounting. It’s part of even a kid’s life. Saving an allowance, spending it all at once ,  these are we are calling accounting principles. More about the principles later in the article.

What are some other businesses where accounting is critical? Well, farmers need to follow very careful accounting procedures. Many of them run their farms year to year by taking loans to plant the crops. If it’s a good year, a profitable one, then they can pay off their loan; if not, they might have to carry the loan over, and accrue more interest charges on that loan.

Every business and every individual needs to have accounting system in their lives. Or else, the finances can get away from them, they don’t know what they’ve spent, or whether they can expect a profit or a loss from their business. Staying on top of accounting, whether it’s for a multi-billion-dollar business or for a personal checking account is a necessary activity on a daily basis if you’re smart. Not doing so could mean anything from a bounced check or posting a loss to a company’s shareholders. Both scenarios can be equally devastating. But sometime the errors made could bring down a whole company, which you may not be able to come back from.

The most basic concept and what it comes down to for Accounting is information, and this information is issued periodically in business as a profit and loss statement, or an income statement.

Let’s go into some of the principals involved in accounting.

 

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Basic Accounting Principles

Accounting has been defined as, by Professor of Accounting at the University of Michigan William, A Paton as having one basic function: “facilitating the administration of economic activity. This function has two closely related phases:

measuring and arraying economic data.

and

  communicating the results of this process to interested parties.”

As an example, a company’s accountants periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss that’s called an income statement.  These statements include elements such as accounts receivable (what’s owed to the company) and accounts payable (what the company owes). It can also get pretty difficult with subjects like retained earnings and accelerated depreciation. This at the higher levels of accounting in most organization.

Much of accounting though, is also concerned with basic bookkeeping. This is the process that records every transaction; every bill paid, every dime owed, every dollar and cent spent and what has accumulated.

But the owners of the company, which can be individual owners or millions of shareholders are most concerned with the summaries of these transactions, contained in the financial statement. The financial statement summarizes a company’s assets. A value of an asset is what it cost when it was first acquired. The financial statement also records what the sources of the assets were. Some assets are in the form of loans that must be paid back. Profits are also an asset of the business.

In what’s called double-entry bookkeeping, the liabilities are also summarized. Obviously, a company wants to show a higher amount of assets to offset the liabilities and show a profit. The management of these two elements is the heart of accounting.

There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be chaos! There is software out there can help small to large business handle the accounting procedures. From free online software for sole traders and single person companies. Examples of these online version are:

https://www.waveapps.com/

https://quickbooks.intuit.com/

https://www.kashflow.com/

and for larger business:

http://www.sageone.com/

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