The business world often refers to accounting as the ‘language of business’, accounti
... ng is the language your business uses to communica...The business world often refers to accounting as the ‘language of business’, accounting is the language your business uses to communicate its health to you. You then use accounting to communicate about your business with lenders, investors, advisors and the government. So as you can see, accounting is a very vital aspect to any company. Most business owners have an accounts department and/or a CPA or CA, they are very rarely involved in the Accounting process or do they have knowledge of Accounting. It is recommended that business owners should know the basics of accounting for the following reasons;
Not only is accounting important for maintaining/ running a business, if you are interested in starting a business of your very own it can be very beneficial to understand the rules of accounting.
Accounting is a vast subject; at universities it is a three year degree to become a first level accountant. It is then further years of study to become a CPA. So how do you fit years of accountant practices into one article? You don’t, you focus on the basics of accounting. The basics are all business owners really need to know, the first is some basic accounting terms.
Having knowledge of the regular terms used in accounting can really benefit when engaging in conversation about your business with either your CPA or future investors. Below are some of the most regular terms used and their definitions-
Balance Sheet
The reason why the balance sheet is important is because it represents the true value of the business including expenses, revenue, assets and liabilities. If your assets outweigh your liabilities then your equity will be a decent sum, this shows a healthy business. But if your liabilities outweigh your assets then your equity could venture into the red, this means your business is unhealthy.
Accounting Equation
Accounting is a system of organizing, recording and analysing. Keeping the equation balanced ensures that each transaction has been accounted for.
To understand the equation you can relate Assets to being the ‘Resources’ and Liabilities and Equity to being ‘Claims on the resources’.
Double entry bookkeeping can be confusing to most business owners, but it is an efficient way to present your accounts, in this method every transaction has a ‘credit’ and ‘debit’ entry. Debit ( ‘+’ )and credit (‘-‘)entry . Assets will normally have a debit balance and Liabilities and equity will normally have a credit, for example if you want to increase the value of an asset you would ‘debit’ the asset account. Another would be if you want to increase the value of a liability or equity account you would ‘credit’ the account.
The ‘income statement’ is a financial statement that measures a company’s financial performance over an accounting period. This performance is assessed by producing a summary of how the business incurs the revenues and expenses. This is through both operating and non-operating activities. It also shows the net profit or loss incurred over a period of time; this is usually the span of a fiscal year. And what is generally included in an income statement whether it’s a ‘Multi-step’ format or ‘Single-set’ Format is listed below.
A cash flow statement shows the changes in the balance sheet accounts and how the income affects the cash and cash equivalents. Overall the cash flow statement is concerned with the flow of cash both in and out of the business. Used as an analytical tool it can give insight into the short term viability of the company. The statement of cash flow is broken down into operating, investing and financial activities.
If someone is knowledgeable with the basics of accounting they will reap the benefits. They will be able to easily converse with their accounts department or investors, be able to analyse their business and have an understanding of its health and they will also be able to use that knowledge to make educated decisions regarding their business. Accounting is the language of any business; and it’s time to speak it. Good Luck.
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