Understanding the basics of accounting


A balance sheet is a summary of the financial balances of a sole proprietorship, partnership or any other business organisation

Finance is an important aspect of our personal and professional lives. Days are gone when it was the job of only experts who were related to the finance or accounts department in a company or an organisation. Now even lay people need to have expertise in many areas including finance and accounting. Listed below is a comprehensive picture of the terms used in accounting.

What is finance: Finance is the study of how people allocate their assets over time under conditions of certainty and uncertainty. A key point in finance, which affects decisions, is the time value of money, which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. Finance can be broken into three different sub categories: public finance, corporate finance and personal finance.

What is accounts: Accounting is a systematic way to record transactions. An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans, PP&E (property, plant and equipment), common stock, sales, services, wages and payroll.

Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organisation. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity, net assets, net worth or the capital of a company and according to the accounting equation, net worth must equal assets minus liabilities.

Profit & loss account: A profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

Ratios: A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organisation. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies.

MIS (Management Information System): A management information system (MIS) provides information that organisations need to manage themselves efficiently and effectively. MISs are typically computer systems used for managing three primary components: technology, people (individuals, groups, or organisations), and data (information for decision making). MISs are distinct from other information systems, in that they are used to analyse and facilitate strategic and operational activities.

Management accounting: Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organisations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

Cost accounting: Cost accounting is a process of collecting, analysing, summarising and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Financial accounting: Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. The fundamental need for financial accounting is to reduce principal–agent problem by measuring and monitoring agents' performance and reporting the results to interested users.

Budgeting: Provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast. Establish the cost constraint for a project, program, or operation.

Cash flow: Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Cash flow is a generic term used differently depending on the subject. It may be defined by users for their own purposes. It can refer to past flows or projected future flows. It can refer to the total of all flows involved or a subset of those flows.

Statutory compliance: Statutory means "of or related to statutes", or what we normally call laws or regulations. Compliance means to comply with or adhere to. So statutory compliance means you are following the laws on a given issue. The term is most often used with organisations, who must follow lots of regulations. When they forget or refuse to follow some of those regulations, they are out of statutory compliance. A company that follows all the rules, is in statutory compliance. Many companies are out of statutory compliance, in part because the cost of following the rule is too high, and/or the consequence is too small to worry about.

Debit-credit: Debit and credit are the two fundamental aspects of every financial transaction in the double-entry bookkeeping system in which every debit transaction must have a corresponding credit transaction(s) and vice versa. Debits and credits are a system of notation used in bookkeeping to determine how to record any financial transaction. In financial accounting or bookkeeping, "Dr" (Debit) means left side of a ledger account and "Cr" (Credit) is the right side of a ledger account.

Financial year & calendar year: A fiscal year (or financial year, or sometimes budget year) is a period used for calculating annual ("yearly") financial statements in businesses and other organisations. In many jurisdictions, regulatory laws regarding accounting and taxation require such reports once per 12 months, but do not require that the period reported on constitutes a calendar year (that is, 1 January to 31 December). Fiscal years vary between businesses and countries. The "fiscal year" may also refer to the year used for income tax reporting. In India, the financial year runs from 1 April to 31 March.

Read more:

Financial management: Introduction to basic accounting principles

Introduction to budgeting



Best Viewed in - 1024 x 768 and above resolution, IE7 & above, & other popular browsers
Copyright © 2011 Flame. All rights Reserved