What Should Everyone Know About Accounting?

Guest Post  by:  John Calamarius  is  a US expat living in Indonesia. He is currently teaching accountancy at the University of Bandung and loves sharing tips and advice with online communities.

Accounting can seem to the uninitiated as something of an arcane art, a box of financial wizardry that is impenetrable to most of us but whose mastery is essential to business success. Here we present a few of the facts about accounting which everyone should be aware of even if they’re not too interested in the finer details.

Double entry bookkeeping

The principle with double entry bookkeeping is that every transaction is written down in two accounts and these have to eventually balance out. Although it was only formally ‘invented’ in the Italian Renaissance of the 14th Century it actually goes back to Babylonian times and almost the dawn of civilisation. An accountant, in the final analysis, is there to balance the books, and this technique ensures that everything is kept on the right track and that all figures eventually tally.

Accounting disciplines

There are two disciplines involved in the accounting role:

  • Managerial – Used internally for keeping an eye on things.
  • Financial – This is the set of facts and figures that external entities such as banks, investors and the government get to see.

Daily sales and expenses figures for example come under managerial accounting whereas the overall summaries of these come under financial accounting.

Balance sheet

This is a business snapshot. It lists the company assets against its liabilities. Assets are things like buildings, assets and bank accounts. Liabilities are such things as loans and supplier financial commitments. The balance sheet also covers ownership equity, which refers to shares in the company, who owns them and how much money came in.

Income statement

This is a way of categorising the various income and expenditure streams. It lists profits and losses for the financial year and hopefully the company is left with a net profit on the bottom line. This is where the saying ‘bottom line’ comes from, as opposed to the top line, which refers to the overall company sales for a given period.

Ledger

The ledger is an accountant’s main book. In it, all the business’s financial transactions are entered in an accepted format. Every company usually keeps three ledger books:

  • General Ledger – This is used to keep a track of all income, expenses, liabilities, assets and equity.
  • Sales Ledger – This is used to keep tabs on customers who have made purchases from the company but who have not paid for them as yet.
  • Purchase Ledger – This is similar to the above, in that it keeps a track of the purchases for which the company itself has not yet paid.

Accounting software

In the age of the computer we’ve gone digital with our accounts. Products such as QuickBooks from Intuit are accounting software packages that greatly simplify the accounting processes of small and large organisations alike. QuickBooks ensures that all financial data is instantly available from a central location in the company and that all necessary paperwork is generated on time. It handles day-to-day accounting tasks effortlessly and little financial expertise is needed to get started with it. Cash-flow figures are kept up to the minute in real time and invoices are created without the need to open other software, so all payments are promptly processed.

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