Introduction to Accounting
What is accounting?
Accounting is said to be the “language of business”. It is a tool used to communicate what is happening to any business, often referred to as “financial information”, to its users in order for them to make informed economic decisions. This “financial information” is found in the “financial statements” of any business entity.
Let’s say that you decided to open your bake shop. You invested your personal savings of $75,000 to your business. After a month of operation, you would want to know what happened to your money, where you spent it, did you receive any income, or how much cash do you have on hand?. These are some of the questions among many that you as a business owner would want to know. But without any accurate records, you have no proof that your business is doing well or not.
If you recorded all your transactions like, the purchase of an oven worth $7,000, materials for making bread and pastries like butter, flour, etc,etc for $8,500, you paid your 2 employees amounting to $20,000, you paid your bills worth $12,000 and you sold $65,000 worth of bread and pastries. With this you can say that you have a cash on hand of $92,500. Sounds easy, right?
This is just a glimpse of what accounting can do for you and your business. Accounting has a broader scope than you can think of, like helping you decide on making investments, knowing how much your business is worth, how much you owe to your creditors… and so on and so forth.
Definition of Accounting
Different accounting bodies or organizations have different definitions of accounting. Let’s take a look at the AICPA’s definition:
"Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof."
1. It is said that accounting is an art. It requires the right skills and creative judgment. You have to be trained well to be able to perform accounting tasks.
Accounting is also a science because it is a body of knowledge. But it is not an exact science because it is dynamic. The rules and principles are constantly changing. These changes are made to improve the accounting standards set by the standard setting bodies.
2. From the definition we can find that there are FOUR PHASES OF ACCOUNTING:
Recording is the phase where you write down or record all your business transactions to your books of accounts
Classifying is grouping together all transactions of similar nature or similar items.
Summarizing is the phase where the classified business transactions are summarized into reports called “financial statements”
Interpreting is the phase where accountants help you understand what financial information is stated in your financial statements in order for you and other users of your financial statements to make informed economic decisions.
3. It is concerned with Transactions or Events with a Financial Character.
Only transactions or events with financial value are recorded in your books of accounts.
Example:
You hired Miss Luz to help you in your bakery. This will not be recorded in your books of accounts because this has no financial value. But once you paid her salary worth $15,000, this is recorded, just like the purchase of land and building, the receipt of payment from customers and the payment of your bills.
4. All business transactions and events are expressed in terms of money.
Amounts are assigned to every business transaction for them to be processed in the accounting system of your business. Like the example previously stated, it is not enough to say that you paid salaries to your employees. You have to input how much you paid and when.
5. Interpreting the results of operation.
As stated earlier, Interpreting is the 4th phase of accounting. Financial information needs to be interpreted in order for the users to understand it, and for them to make decisions based thereon.
By looking at the definition alone, you will find important accounting concepts and also what accountants can do for you and your business.
How about at home? Do you often go to supermarkets and check all your receipts? Do you jot down your expenses and income? Do you have a budget?
Accounting is everywhere. Look around you and imagine how accounting works in the different establishments in your area and even at your home too. From managing your own money to managing your business and looking at big corporations, where there is business, there is accounting!
