Accounting is the process of recording all the financial transactions of a business. All the information gathered is stored, summarized and analyzed. It presents the various reports like financial statements or financial reports which show all the financial-related activities in the business operation.
Accounting is considered to be the language of business because it acts like a language that the managers use to communicate and give financial information of a firm to its clients, creditors, and shareholders.
Digging Deeper with Business and Accounting
It is essential for people in business and firm to know accounting for them to be able to better understand all the financial information and transactions in the company. Accounting is an essential key to any firm in keeping its financial records and be able to read and interpret these financial statements.
Assets = Liabilities + Owner’s Equity is the component of the accounting equation.
Assets like properties, machinery, and cars are items whose values can be converted into cash which is owned by the business. Liabilities, on the other hand, are financial obligations of the company like loans. While the owner’s equity refers to the amount of money that the person invested in the business. It is essential to note that both equations must be equal which indicates a balance accounts in the company.
Accounting is a systematic process in the sense that it follows the accounting cycle which means the collective process of recording, analyzing and identifying all the financial activities in the company. Accounting all starts with the transactions which will then be presented in the financial statements and will end on closing all the accounts.
These are the eight steps of the accounting cycle:
Step 1: Analyzing
Analyzing the business transactions and events is crucial in the accounting cycle. It is essential here that you’ll be able to determine where to place each entry. It will be your basis in recording these transactions.
Step 2: Journalizing
Journalizing is recording all the data you gathered and summarized from the business transactions in the accounting records. It is essential that it is chronological to prevent any lapses or errors. Each entry must consist of the date of the transaction, the amount and account debited and credited, and some brief information about it.
Step 3: Posting
All the transactions and information or the journal entries are transferred to the general ledger. It is where you see the balances of each financial account from the assets, liabilities and owner’s equity. Also, you’ll be able to look at the changes regarding its balances.
Step 4: Trial Balance
Trial balance provides the list of account balances in the general ledger accounts at the end of accounting periods. It consists of two columns which are the debit balances and credit balances. The debit amounts are placed in the debit column, while the credit amounts are in the credit column. Always note the debit and credit balances column must have equal balances.
Step 5: Worksheet
Accounting worksheets are vital in the accounting cycle because they are used to prepare the financial reports. It includes columns for the unadjusted and adjusted trial balance and the financial statements.
Step 6: Adjusting Journal Entries
Adjusting entries in the journal entries are used to correct accounts and record the accrual and deferral accounting basis. Types of these entries include accrued revenues and expenses, deferred revenues and deferred expenses, and depreciation expenses and accumulated depreciation.
Step 7: Financial Statements
Financial statements are the summary of financial reports of the business. These are written records of the business and serve as analysis to all the financial information. It is often audited by the accountants, firms, and other financial agencies to ensure that its details are accurate.
Financial statements consist of four major components which present all the summarized financial information. It includes the income statement, balance sheet, statement of changes in owner’s equity, and the statement of cash flows.
Step 8: Closing Entries
Closing entries are used at the end of the accounting period. These are journals entries which close all the nominal or temporary accounts. These are the income statement accounts such as the revenue and expenses and drawing accounts. The main purpose of closing entries is to zero all the temporary accounts in the general ledger.
Temporary accounts also transfer its balances to real or permanent accounts or balance sheet accounts. Permanent accounts include assets, liabilities, and owner’s equity accounts. Its account balances will be the beginning balances in the next accounting period.
Accounting is a vital cog in every business as it helps them keep all of its financial records. It serves as communication to every transaction between their shareholders and creditors to better understand each other.
Indeed, applying the accounting cycle in all the business transactions will keep analyzing its financial performance thoroughly. It is then essential that you have in-depth knowledge about compass accounting and other accounting related techniques which will surely help you manage your business well.