Accounting is frequently called the “Language of Business” because of its ability to communicate financial information about an organization. Various interested parties, such as managers, potentials investors, creditors, and the informed financial decisions. An effective accounting system therefore must include accurate e collecting, recording, classifying, summarizing, interpreting, and reporting of information on the financial status of an organization.
In order to achieve a standardized system, the accounting process follows accounting principles and rules. Regardless of the type of business or the amount of money involved, common procedures for handling and presenting financial information are used. Incoming money (revenues) and outgoing money (expenditures) are carefully monitored, and transactions are summarized in financial statements, which reflect the major financial activities of organization.
Two common financial statements are the balance sheet and the income statement. The balance sheet shows the financial position of a company at one point in time, while in income statement shows the financial performance of a company over a period of time. Financial statements allow interested parties to compare accounting periods within one organization. For example, an investor may compare the most recent income statements of two corporations in order to find out which one would be a better investment.
People who specialize in the field of accounting are known as accountants. In the United States, accountants are usually classified as public, private, or governmental. Public accountants work independently and provide accounting services such as auditing and tax computation to companies and individuals. Public accountants may earn the little of CPA (Certified Public Accountant) by fulfilling rigorous
requirements. Private accountants work solely for private companies or corporations that hire them to maintain financial records, and governmental agencies or bureaus. Both private and governmental accountants are paid on a salary basis, whereas public accountants receive fees for their services.
Through effective application of commonly accepted accounting systems, private, public, and governmental accountants provide accurate and timely financial information that is necessary for organizational decision-making.
Financial statements are the final product of the accounting process. They provide informato on the financial condition of a company. The balance sheet one type of financial statements, providers a summary of what company owns and what it owns on one particular day.
Assets represent everything of value that is owned by a business, such as property, equipment,and accounts receivable. On the other hand, liablities are the debts that a company owes-for example, to suppliers and banks. Ifliablities are subtracted from assets (assets – liabilities), the amount remaining is the owner’s share of a business. This is known as owner’s or stockholders’ equit represent everything of value that is owned by a business, such as property, equipment,and accounts receivable. On the other hand, liablities are the debts that a company owes-for example, to suppliers and banks. Ifliablities are subtracted from assets (assets – liabilities), the amount remaining is the owner’s share of a business. This is known as owner’s or stockholders’ equity.
One key to understanding the accounting transactions of a business is to understand the relationship of its assets, lialibities, and owners’ equity. This is often represented by the fundamnental accounting equation: assets equal liabilities plus owners’ equity.
ASSETS = LIABILITIES + OWNERS’ EQUITY
These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equationalways remains in balance;in other words,one side must equal the other.
The balance sheet expands the accounting equation by providing more information about the assets, liabilities, and owners’ equity of a company at a specific time (for example,on December 31, 1993). It is made up of two parts. The first part lists the company assets, and the second part details liasbilities and owners’ equity. Assets are divided into current assets. Property, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income taxes payable) and long-term liabilities (such as bonds and long-term notes).
The balance sheet provides a financial picture of a company on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision making. Externally, it gives potential investors data for evaluating the company’s financial position.
