Accounting is the measuring and processing of calculation information for economic institutions. It is often referred to as the “language of business”. The professionalists in the field of accounting are known as accountants. Even if you are not an accountant yourself, there are some things that everyone should know about accounting.
Accounting has two sub-categories. There are the managerial and financial accounting. Managerial is the private track keeping practice. Financial accounting is the display part of accounting where the accountant presents the data to outside sources such as the bank or potential investors.
The two foundations of accounting are assets and liabilities. The asset is the accounting of things that one owns. Liabilities are things that are owed or loaned. The two are usually correlated — when you buy assets, you often need a loan.
Credit and Debit
Credit is the entry of increasing liabilities. Debit is the asset measurement. Traditionally debit is written on the left side while credit is written on the right side of the ledger line on record keeping.
Different Types of Ledgers
Ledgers are the books where the transactions are kept written. There are usually 3 types of ledgers — general ledger, sales ledger, and purchase ledger. A general ledger keeps track of the income, credit, and debit. A sales ledger kees track of clients who have purchased but have not paid. A purchase ledger shows the purchases made that are not paid yet.
Accounting is Not Like Mathematics
Accounting does not use exact calculations. It is a practice that involves more judgment than science. The accountant has to know practical things like tax policies, the fluctuation of inventory prices, and asset lifetimes.
Each transaction that is carried out must be written in two records and eventually balanced out. This helps accountants eliminate errors that could accidentally be done by a mistake in one of the books.
Statement of Cash Flow
If an accounting is done for a business, it is important to keep track of the cash flow. Cash flow is the important part of a business. If a business makes a lot of sales but the customers have not paid yet, the sales are not legitimate. The cash flow statement shows how the cash is increasing and how the cash is sent on actual inventories.
Equity is the difference between the assets and liabilities. It is the actual worth of the business. An equity that is below zero means that the business is broke.