What is Accounting?
According to Investopedia, accounting is the "process of recording financial transactions pertaining to a business," which includes "summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities." The accounting field encompasses many areas, ranging from basic concepts like assets, liabilities, and equity to more complex dimensions such as financial analysis, cost accounting, and auditing. To further explore and understand the broad accounting field, this article defines and describes some fundamental accounting terms.
Basic Accounting Terms
Here are some accounting terms which everyone in the accounting field needs to know:
Asset: There are two types of assets in accounting: Current Assets (CA) and Fixed Assets (FA). Current Assets can be converted into cash within one year and can be either inventory or accounts receivable. Fixed assets, such as machinery and real estate, will provide companies with more long-term financial benefits, as they are more prominent after one year.
Balance Sheet: This is a financial statement or report that records an organization's assets versus liabilities and owner and shareholder equity at certain stages during an accounting period.
Bank Reconciliation: This is a process in which accountants match accounting record balances for a cash amount correlating to a bank statement to appropriate the changes to the accounting records.
Credit (CR): Credits are the accounting entries that can positively decrease assets or increase liabilities. They are the opposite of debits and are on the right side of accounting documents.
Debit (DR): These are accounting entries which differ from credits, yet still have the same function of increasing liabilities or decreasing assets. They are on the left side of the accounting documents.
Equity: This refers to the general money a business or company would have if it were to sell all of its assets and pay its debts. It acts as an encapsulation of the amount of the company held by its owners and investors. In a private organization, the amount belonging to the owners is known as owner's equity, while the amount belonging to the investors is known as shareholder's equity.
General Ledger: This is an account that contains all ledger accounts, which are accounts used by organizations to record transactions. General Ledgers, or GLs, record all transactions during one accounting period. Asset, equity, or liability accounts may exist in a general ledger. Each recorded transaction or sub-account is a journal entry in a general ledger.
Income Statement: A business-generated financial document highlighting the revenue a company gains in an accounting period regarding the expenses used during the same period. Income and balance sheets and cash flow statements are among the three business-issued financial statements.
Liability: A liability is easily described as when a business owes another entity money. Such an entity could be a person or company being owed through bank loans or credit card debts. There are also current and long-term liability distinctions. Current liabilities are due within one year of a financial statement date, unlike long-term liabilities, which are due past one year. Liabilities are prevalent in limited liability company structures, where business owners can distinguish between personal and company finances.
Special Journals: This encompasses all accounting journals but the general journal. They record extensive information, such as significant financial transactions typically recorded in the general ledger.
Conclusion
Accounting plays a vital role in the financial management of businesses, companies, and organizations, as it is the backbone for recording, summarizing, and reporting financial transactions and issuing financial statements. The accounting field is versatile and diverse, covering various concepts and terminologies essential for understanding and analyzing an entity's financial health and stability. From fundamental terms such as assets, liabilities, and equity to more complex aspects such as income statements, bank reconciliations, and special journals, each element provides a comprehensive view of a company's financial position. By maintaining accurate and proper accounting practices, businesses can make sensible and informed decisions, comply with financial requirements, and display financial stability to shareholders and investors. Overall, accounting is a foundational discipline that empowers businesses to efficiently and efficiently manage their finances and maneuver through the complexities of the finance world.
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