Accounting

What is Accounting?

     The image of an accountant used to be a hunched over and bespectacled older man sitting in a dark room with stacks and stacks of paper.  That image could not be more outdated!  Now, an accountant is a savvy business professional who contributes substantially to a company’s bottom line.  Becoming an accountant is a smart choice for many (especially if you have a “knack” for numbers).  But, first you’ll need to know what accounting is, and more about understanding accounting practices.  You DO need to understand some accounting principles and terms, but we can relate them all from the business world to our everyday lives.

     To put it simply, accounting is about keeping track of our money.  Accounting is how businesses monitor income, expenses, and assets over a given period of time.  Accounting often is referred to as “the language of business” because of its role in maintaining and processing all relevant financial information that an entity or company requires for its managing and reporting purposes.  Accounting is a field of specialization critical to the functioning of all types of organizations.

     So, in our everyday life “accounting” is keeping track of our money!  Where does it come from?  Where does it go?

     Unlike the U.S. government or other world governments we cannot simply print ourselves more money when we run low (well, not legally).  These governments are now realizing that you CANNOT live off credit indefinitely!  Sooner or later there comes a time of reckoning!  We may find ourselves at this point when we are out of money — but there is more month left!

     Outside the government, the banking system is the only means of creating additional money (I will explain later).  However, now they have learned (I hope) their money IS NOT real and can lead to many financial difficulties if not handled correctly.

     Accounting is also a body of principles and conventions, as well as an established general process for capturing financial information related to an organization’s resources.  Accounting is a service function that provides information of value to all operating units and to other service functions, such as the headquarter offices of large corporations.

     Accountants learn about accounting and engage in a wide variety of activities besides the basic bookkeeping or preparing financial statements and recording business transactions.  Accountants also compute costs and efficiency gains from new technologies, participate in strategies for mergers and acquisitions, quality management, develop and use information systems to track financial performance, tax strategy, and health care benefits management.  Good accountants are vital to a company’s success.

     Good accounting in your personal life is necessary if you are to function within the boundaries of your financial means.  You need to know where you are financially, how you will maintain this position, or what is necessary to change your present circumstances.  You need to prepare and operate within a well thought-out plan of operation.

     Think of the comfort of having a plan in place for you, for your family, which could take the disaster out of an untimely event.

     Think of the power you will feel if you get easy-to-understand information on a regular basis so you can monitor your personal spending habits.

     So — quite simply put:  Accounting is a language:  a language that provides the information you need to understand YOUR financial position.

     In the business world, this information is provided by means of a (1) Balance Sheet, (2) Income Statement, and (3) Statement of Cash Flow.

     The whole purpose of accounting is to provide information that is useful and relevant for interested parties when making decisions regarding the company and its operations.

     The same should be true about your personal financial situation.  Your financial circumstances may not be as complicated as General Motors, Exxon, or some other large corporation; however, the principles of accounting should be used for YOU to UNDERSTAND where you are in your financial life.

     Now, DON’T let the accounting terms cause you a great set-back.  Within any profession you have terminology that is specific to that line of work.  You just need to basically understand what it is we are talking about.

When I mentioned:

            (1)  Balance Sheet:  It is a status report that shows information about the organization’s resources at any one moment in time: Its assets, liabilities and owner equity (stockholders equity).  For you this simply means what do you own?  What do you owe?  The difference is your net worth.

            (2)  Income Statement:  It is a report that shows the flow of revenues and expenses over a given period of time.  You might look at YOUR income statement as what money did you receive during the month and what money did you spend?

            (3)  Statement of Cash Flow:  This statement details the movement of CASH through the organization over a specified period of time.  For you this report would track your cash movements.  It would NOT necessarily agree with your “income statement” because you may make purchases on CREDIT or CHARGE ACCOUNTS and the actual “payment” (or cash out flow) would be a totally different figure.  (Let’s not get too tangled in the terminology at this point.  I think it will become clearer as we go along in understanding your financial picture.)

     However, I think you can understand the need for these three (3) specific reports to give you a clear picture of your financial standing.

So, Why Do We Need Accounting?

     Asking that question of an accountant is like asking a farmer why we need rain.  We need accounting because it’s the only way for business to grow and flourish.  Accounting is the backbone of the business financial world.  After all, accounting was created in response to the development of trade and commerce during the medieval times.

     Italy is our first recorded source for accounting entries, and the first published accounting work in 1494 was by a Venetian monk.  So you see accounting as an organized method for record-keeping has been around almost as long as the trade and business industries themselves.

     Another interesting fact is the knowledge and principles upon which the first accounting practices were established, have changed very little in the many hundreds of years that accounting has been in use.  The concepts of assets, liabilities, and income and the need to reconcile these areas is still the basis for all accounting functions today.

     The process for recording those transactions, and the many reports generated by the compilation of that information has evolved over the last two hundred years.  Thanks to the creation of computers, many of the bookkeeping functions that are vital to accounting, but somewhat repetitive are performed by data entry clerks, and the reports generated come back almost instantly.

     The same is true for our personal financial lives.  We must spend the necessary time to understand our position and financial condition, regardless of how simple or how complex our specific needs may be.

     As you can see, accounting will affect every aspect of YOUR life, for better or worse!

PS

     A great way to better understand your financial situation and needs and to especially provide some training for your children is through an extensive budget and finance program that parents and their children of all ages can watch together.  Check out this program:  Family Finance Video Master Class.

QUOTE TO CONSIDER

THOUGHFUL GEM

"If your road to success isn't there yet,

lay out your plan and build it!"