Accounting is one of those subjects that everyone knows something about but nobody ever feels really interested in, or even knows exactly what it’s about. In fact, the topic can cause feelings of detachment and disinterest among people because there is typically very little sense of the “why” it came about or what it’s applied to. Accounting is simply the art, process, measurement, and communication of financial data about both large non-financial enterprises like corporations and small organizations. It deals with the generation of reports and the preparation of reports for regulatory authorities and investors.
Accounting provides decision makers with the information necessary to make decisions about how to manage their assets and liabilities, as well as understand the implications of those decisions upon their operating budgets and finances. For example, one would look at the management of a manufacturing plant to understand the effect of increases in labor and other operating costs on profits and output. In the case of accounting basics, the focus is on the financial reports that need to be prepared and produced by the company in order to report these to investors, regulators, and management.
The first section of accounting involves the collection of financial statements, which are statements of the businesses financial position as of a particular date. Those financial statements are then processed to produce the reports that we all know about, namely, income statements, balance sheets, and statement of cash flows. Some accountants specialize in just one or two of these sections, while others have expertise in all of them. In addition, some accountants are qualified to perform audits of the financial statements, another essential element of basic accounting.
Auditors also look at the preparation of the financial statements, examining the organization’s internal control system, or its processes for maintaining the accuracy of its financial statements. Because of the importance of these documents, accountants use a variety of techniques and procedures to ensure that the internal control system operates efficiently. Two techniques that are used by accountants are the single-entry and double-entry accounting transactions. The single-entry accounting transaction is a process of recording only the changes in a business’s assets and liabilities on a particular date. When these records are later reviewed for accuracy by an independent auditor, a record of all transactions affecting a particular asset or liability will be produced.
The double-entry accounting transaction involves the use of more than one entry for a financial transaction. Instead of using only one entry, several different records are used to record the various financial transactions. Because of this, there is the possibility that data entries could be made accidentally. While an error can sometimes be made in these recorded transactions, when an error is detected, the double-entry accounting procedure can be used to retroactively correct the recorded data.
While these practices may not always be utilized by accountants who work for small business owners, they are absolutely necessary for most business transactions that must be recorded by law. For example, a business needs to purchase equipment such as computers, cell phones, and other technology in order to conduct its daily operations. Because purchasing such expensive items can take several months, it is essential that these items are not held by an individual for any length of time. The most effective method for doing this would be for the company to hire a company that purchases such items on a temporary basis. This helps prevent errors from being made when a needed item is purchased and held back for the incorrect period of time.