Accounting Tutorial for Beginners
Understanding accounting concepts can help you become financially savvy and give you the tools necessary to evaluate a firm's economic health. Companies rely on accounting procedures to tell the rest of the world how they performed over a specific period of time. As a business owner, establishing sound accounting and record-keeping procedures helps you run operating activities more efficiently.
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Identification
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Accounting policies allow a company to record its transactions and publish its financial ups and downs at the end of a specific business period, such as a quarter or fiscal year. Bookkeepers work under the guidance of accountants to record corporate operating data in ledgers. A ledger is a two-faceted accounting form used to record debits and credits to financial accounts, such as assets and debt.
Regulatory Context
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Various organizations set norms that accountants must follow when recording and reporting corporate data. The most important standard-setting agencies include the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board.
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Significance
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Accounting is key to the success of every business activity. Without sound accounting policies, companies may be unable to gauge business performance compared to the competition. These policies are also helpful for evaluating whether a strategic plan makes sense based on a company's operations. Strategic plans include funding initiatives or long-term agreements with vendors and customers.
Assets
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An asset is a resource that a company owns and on which it relies to operate. Short-term assets, such as accounts receivable and inventories, are convertible into cash over a period not exceeding 12 months. Long-term resources serve in operating activities for more than one year. These assets include real estate, manufacturing plants and equipment.
Debt
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A debt is a liability that a borrower must repay. Short-term debts include accounts payable and salaries. Long-term liabilities include bonds payable and notes due.
Expenses
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Expenses are charges a company incurs through its operating activities. Examples include salaries, rent, insurance and office supplies. Some expenses, such as depreciation, do not involve any cash payment. Depreciation enables a company to allocate the cost of its long-term assets over several years.
Revenue
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Revenue is income a firm generates by selling goods or providing services. Revenues include earnings from sales, commissions and interest income from short-term savings accounts.
Equity
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Equity represents a company's ownership portion. Investors who buy corporate shares are known as shareholders or stockholders. Shareholders are entitled to periodic dividend payments. In addition, they can vote on important subjects, such as a merger with another firm or the compensation of top leadership.
Financial Reporting
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Financial reports tell the tale of a company's performance and compliance with accounting norms. These statements represent a trove of corporate operating data. A full set of financial summaries includes a balance sheet, an equity statement, a cash flow report and an income statement.
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References
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