Accounting business
Accounting business is the principal accounting record into which all transactions of the company are recorded and summarized. The general ledger is the record from which information for the basic financial reports is drawn. It varies greatly in appearance. These were once huge books maintained with carefully handwritten entries, but nearly all general ledgers today are produced by computer software.
Chart of accounts:
The entire recording process of any accounting system requires a basic organization of data so that the payment of vendor invoices, for example, can be later summarized and reported with some clarity so to what was done, why it was done and how organization benefited from these expenditures. This basic organization is called a chart of accounts.
The organizing system for the company's accounting data is a collection of buckets, or accounts, each with a particular kind of data inside. There might be a bucket for each individual asset the company owns and a bucket for each individual debt the company is in.
The chart of accounts is an organized comprehensive list of all those buckets. The buckets, in turn, are labeled with their appropriate account number and arranged by the kind of data they hold, so that accountants can quickly find the right bucket in which to store the latest piece of data about a particular asset or liability. These buckets are then arranged and rearranged during the accounting process and their contents are counted and checked usually monthly to produce reports that summarize the data they contain.
The numbering convention used to help accountants identify assets from liabilities and income from expenses. There are endless schemes of account numbering but all will follow some similar kind of arrangement to facilitate the coding of transactions. Notice also that some accounts are indented and numbered to indicate are subordinate to others. These sub-accounts provide a further breakdown of the larger categories into smaller categories to save time later in analyzing the data.
Accrual Accounting:
Generally accepted accounting principles (GAAP) - A set of rules, conventions, standards and procedures established by the financial accounting standards board for reporting financial promotion.
The accounting rules outlined in GAAP require the most companies keep their accounting records on the accrual basis. The alternative is the cash basis, meaning a transaction is recorded only when cash changes hands. Cash basis accounting is not considered indicative of economic realities, thus the requirement for accrual accounting except for certain kinds of companies, such as very small businesses and come not for profit organizations.
When the sales department obtains an order from one of the customers and the product is shipped to the customer, a sale has been consummated and it is recorded. This transaction will appear on the income statement even though not a single dollar appears on the income statement even though not a single dollar may have passed from the customer to the company. The transaction is recorded by increasing sales and by increasing accounts receivable, the amount due from the customer.
Later on, perhaps the following month, the customer pays his or her bill and the company receives the cash. That transaction will not appear on the income statement. It was already recorded as income when the sale was made and under accrual accounting rules; only the sale itself is considered an income producing event, not the act of collecting the money.
This example demonstrates the essence of accrual basis accounting. Transactions are recorded when an economic event is deemed to have occurred. A sale is an economic event because a binding agreement has been reached, the customer agreed to accept the merchandise and pay for it in due course and the company shipped the merchandise on the customers promise to pay. That is an economic event, an offer made and accepted.
The principal financial statements:
There are three primary financial statements formats that appear in every annual report and most internal monthly financial reports as well.
The Balance Sheet: This is the report showing the financial condition of the company as of a particular date, usually the end of a month, a quarter or a year. It shows all the assets of the company, valued typically at the cost to acquire them, but in some cases assets might be shown at the lower of cost or market value, when the accounting rules indicate a permanent reduction in value below cost. Similarly, the companys liabilities are shows at the amounts borrowed or owed. Some of these are exact amounts and some may be estimated based on the best available information.
The income statement: The income statement recaps all of the activities of a company intended to produce a profit. It shows the amount of sales, all the costs incurred in making those sales, and all the overhead costs incurred in running the operations of the company so it would be able to deliver on its promises to customers. This statement goes by various names including income statement, profit and loss statement, statement of income and expenses, operating statement.
Statement of cash flow: The income statement shows activities that were recorded with accrual basis of accounting. However, companies that keep their books using accrual accounting still will have transactions that do not appear on the income statement, usually involving the exchange of cash.
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