Accountancy For Every Business is Must
A business (Company D), purchases 20 tickets to a local sporting event at $10 each for a grand total of $200. Therefore Company D has spent $200 of its cash on hand. Company D's "Cash" account would be credited for $200. Likewise, one of Company Ds "Expense" accounts would be debited for $200. A corresponding journal entry would be written to notate this. While this example has been greatly simplified, the conceptual aspect is sound.
Keeping track of your personal finances may only require a few entries per month, depending on the number of significant financial transactions you perform. However, businesses are in a much different scenario. Due to the scope of their operations and the sheer number of different accounts they maintain, it is vital they organize their transactions in an easy-to-view format. The format of choice is a "T-account." A t-account looks just as its name may indicate - a "T." The name of the account serves as a header while debits occupy the left side of the "T" and credits occupy the right. This allows auditors as well as company accountants to quickly find transactions and follow the flow of money throughout the company. For every account that a company maintains, a corresponding t-account is created.
These t-accounts are then grouped into three major categories; "assets," "liabilities," and "stock holders' equity." These categories make up a fundamental equation that all accountants must know; ASSETS = LIABILITIES + STOCK HOLDERS' EQUITY. Accounts that are grouped under the "assets" label include cash, accounts receivable and equipment. Accounts payable, accrued expenses and wages payable are some of the "liability" accounts, while retained earnings and capital stock are the main "equity" accounts.
The final piece of the accounting puzzle for a company is the preparation of financial statements
. These statements are made up of every account and calculation that has been previously mentioned. A balance sheet is specifically comprised of the "assets = liabilities + equity" equation. An income statement contains information regarding the revenues and expenses of a company. In short, every financial statement builds on the data contained in the previous one, just like accounts and journal entries are derived from each other. If you are looking for visual examples of these statements, I highly recommend searching for them with "Google Images." While perhaps an obvious answer, a visual aid is often crucial in truly comprehending a subject.
In closing, I am hopeful that this overview has given you a basic understanding of some of the building blocks of accounting. As I have demonstrated above, a basic grasp of accounting is essential, not only to understanding the functions of modern day businesses, but to understand personal finance as well. Finally, if this piece has inspired any of you to seek out further education in the accounting field then I have fulfilled my purpose.
.
