Importance of Accounting

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Anybody could sell a product, or perform a service, and make money for it. Without an accounting method, a person doesn't know if he is making or losing money. Accounting also forces people to know business mechanics, what they own, what they have made, as well as how their inventory is moving. Accounting is important to both, families and businesses. Here are the essentials.

Personal Accounting

A person that has balanced a checkbook is practicing basic accounting. She wants to know what her real checking balance is, so she compares her checkbook totals with the bank's totals. After isolating what the checkbook and bank account statements agree on, the account holder could review differences. Examples of differences include checks headed to the bank, and bank fees and interests. If there is a difference, the checkbook holder could investigate it. This means going through all personal expenditure records. The person in this example uses accounting to keep track of personal finance.

Hot Dog Vendor Accounting

One of the simplest ways to see accounting's importance is with a sidewalk hot dog vendor. Each of the materials the vendor uses to put the hot dog sandwich together cost money. If a vendor starts with 500 hot dogs, and he sells each for $2, he should have $2 for every hot dog that is no longer in his cart. If he sells 100 hot dogs, he should have 400 hot dogs left, and $200. Accounting plays another importance. Using this same scenario, say there is a manager supervising five hot dog vendors. One vendor turns over 300 hot dogs, and $300. Since 200 hot dogs are missing, the vendor should have turned $400over, so $100 is missing. Without being at the scene, the supervisor raises an eyebrow and starts to ask probing questions.

Inventory Accounting

Accounting is used to minimize or eliminate financial or inventory loss that could result from inventory transfers. For example, a store orders 10 bottles of Vitamin C from the supplier. The supplier sends 10 bottles of Vitamin C to the store, reducing the inventory count by 10 bottles, and increasing his "accounts receivable" by the value of the 10 bottles. The store receives the package. The store owner counts the bottles to make sure that she is receiving 10 bottles, and then prepares a payment voucher in the value of the 10 Vitamin C bottles. The store owner reduces the available cash by the value of the 10 bottles, while the supplier converts "cash receivable" to "cash."

Cash Resister Accounting

A shopper places eggs, milk, potatoes and apples, on the conveyor belt. The cashier rings each of those items up. The store's eggs, milk, potatoes and apple, inventory is automatically reduced when they are rung up. The store's cash inventory is automatically increased. At the end of the shift, the cashier's cash register activity is checked. If $1,000 worth of groceries were rung up properly, then the cashier should turn over $1,000. Since the cash register records what was rung up, the cashier has to be honest. If $1,000 worth of items were rung up, but the cashier turns in $900 then the manager could suspect two things--either the cashier rung things up wrong, or the cashier is stealing.

Employment Hours Accounting

Employees use basic accounting when they compare the hours they worked with their pay stubs. If an employee worked 80 hours during a two-week pay period, and he gets paid $10 an hour, the employee will naturally expect to get $800. If this employee sees a difference, and has the record to prove that he worked hours that requires a higher payment, he could resolve this with the pay department. If the employee was underpaid by $200, and the pay department is wondering why they have an extra $200 on their books, then both employee and the pay department can resolve their issues. Accounting helps a company keep track of employee hours, and it helps them isolate problems if they end up with more, or less, cash than what their records say.

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