Essential basics of accounting

Accounting is the system of recoding, measuring, analyzing, and presenting summarized financial information to interested users (both internal and external). Accounting is a tool that managers use for their decision making process. Accountants put together numbers that were collected by others and process it to make useful and understandable charts of data. For example, responsible employees in the warehouse record information about incoming and outcoming inventory and accounting department process this numbers further to prepare the financial statements. Some people say that it is a language of the business which should be understandable for everyone. Some people say that it is a language of the business which should be understandable for everyone. Accounting is divided into financial and managerial.

What is financial accounting?

Financial accounting is the process that culminates in the preparation of financial statements for use by both internal and external parties. It is usually historical data in nature that had happened during previous fiscal year.

What is managerial accounting?

Managerial accounting is the process that provides usually current and prospective information for internal users, including managers. Managerial accounting focuses a lot on costs and profits.

Why do we need accounting?

The users need that financial information in order to make countless decisions to keep their business successful or get some profit from someone else’s business. Accounting developed over centuries from simple to complicated and become advanced when businesses advanced.

Accounting helps to answer many questions, such as how to determine how is your business doing (whether it is making, losing money, or just breaks even), which projects to incorporate based on their potential profitability, how to finance new business endeavors, and how to persuade public to invest money in or lenders to lend money to the organization.

Accounting helps users to analyze and evaluate the data in order to make necessary decisions. For example, internal users (managers) want to see how their business going and what areas need some improvements. On the other hand, external users (creditors) need to make sure that they invest in right companies that will be able to pay off their debts.

What is double entry accounting?

Double entry accounting is a concept of using at least two of the accounts in order to record the business transaction where amount from all debits will equal the same amount from all credits. It doesn’t really matter whether you use one debit and two credit accounts or vice versa the amount should be the same on both sides. Example of one such transaction can be Dr. Equipment and Cr. Cash or Accounts Payable which means that you paid for the equipment whether with cash or purchased it on an account. Any account has Debit (Dr) and Credit (Cr), Dr is all the time right side of the T-account under any circumstances and Cr is all the time left one no matter what. Normal balance of an account can take both sides whether Dr or Cr depending on its nature (normal balance of an account). For example, such asset account as Cash will have normal balance of account Dr whereas such liability account as Accounts Payable will have Cr as a normal balance account. Therefore, if a company makes an entry on the left side of an account, it debits the account and when the company enters an amount on the right side, it credits the account. The debit balance will be in the case if total of the debit amounts exceeds the credits and vice versa.

What is bookkeeping?

Bookkeeping as a part of accounting process is for recording financial transactions of an organization. Normally difference between responsibilities of a bookkeeper and accountant is that first one brings the books to the trial balance stage whereas accountants start to culminate the data by preparing the financial statements and necessary notes to them.