After completing my first year of business classes
at West Chester University, I realized how important accounting
knowledge is for any business major. Regardless of the field of
business that you choose to pursue, whether it be marketing,
management, economics, or finance, you will need to be able to have at
least a basic understanding of accounting. Every business has to deal
with observing and understanding source documents, income statements,
balance sheets, and statements of retained earnings in order to be
successful in today's business world. Anyone interested in
entrepreneurship who is looking to start their own business will have a
definite advantage if they can understand financial statements of
accounting. The truth is that accounting exists in our every day lives
whether you realize it or not, so being educated in the field will do
nothing but help you in a future business career.
The process of accounting will almost always begin
with source documents. In the past, most of the source documents that
CPA's (Certified Public Accountants), auditors, and other accountants
would have to deal with were tangible paper documents such as receipts
from a recent purchase at a store. The accountant would then have to
transfer these source documents into a journal to start the accounting
process. Today, most of the source documents are electronic. When a
purchase or sale is made between any two businesses or consumers, it is
filed into a computer on an electronic database. This method has made
accountant's jobs far more simplistic, as they can they place the
transaction directly into an electronic journal on Microsoft Excel.
The basic accounting equation that anyone who
works in business should know, is that Assets= Liabilities + Equity.
Assets include accounts such as cash, land, building, equipment, office
supplies, inventories, and accounts receivable (money owed to you by a
customer). The normal balance for these assets are a debit, which means
if you are gaining any of the previous, you debit that amount of money
towards that account. For example, if a sale is made in your store and
a customer pays fifty dollars cash, then you would debit the cash
account for fifty dollars. Liabilities include accounts payable (what
you owe others on account), unearned revenue (you have been paid but
haven't performed a service), salaries payable (salary money owed to
your employees), taxes payable, and interest payable. The normal
balance that increases these accounts is a credit, unless the account
is a contra account in which the opposite normal balance applies.
Equity accounts include dividends (money owed to your stockholders),
revenues and expenses. The normal balance for owner's equity is a
credit, but expenses made by your business are always treated as contra
accounts. So for a transaction where a customer purchases something
from your store on on account, you would debit accounts receivable and
credit revenue. Each transaction is then recorded into a journal
organized by month.
At the end of each month, the totals are added up
from the journal and are placed into what are called "T-Accounts".
These are T-shaped charts with the debits on the left side and credits
on the right. It is used to more easily find the ending balance of each
account at the end of the month. After the totals of each account are
found, you can now make an income statement to determine your amount of
money lost or made during the month. The amount of income can be found
by subtracting the expenses from your revenues. This is one of the most
important financial statements that accountants have to deal with. Your
income statement helps you determine if you are making profits or if
you are losing money and need to improve a sector of your business.
Once you have transferred all of your journal
entries into T-accounts and have made an income statement, you are then
prepared to make a balance sheet. This is the basic accounting equation
in which you make sure that Assets = Liabilities + Owner's Equity. When
you sum all of your asset accounts they should be equal to all of the
liability and equity accounts as well. This is why anyone in any type
of business should always have a basic understanding of the accounting
process. With the knowledge of how money flows throughout a business,
you can make wiser, more experienced decisions with your business, and
protect yourself from losing money. It also allows you to take risks
with your business and potentially gain a big return when it comes to
the bottom line of your income statement. I'm pleased to say that I can
now understand a company's financial statements and comprehend the
transactions that go on in every day business. Any business student
will be more successful in their future career if they learn the
crucial basics of accounting.
Article Source:
http://www.articlesbase.com/business-articles/
the-importance-of-basic-accounting-knowledge-in-business-3345013.html About the Author
Sean Bonatz
West Chester University |
