Accounting 101

How Accounting Works

In essence, accounting is a way of communicating the financial health of organisations or businesses to any plus all interested parties. It's a method of assessing the cash flow, assets and liabilities, or an entity's future for all current as well as future investors. Accounting is the life force of any business; all businesses have basic information recorded to fulfil that task.

All bookkeeping or accounting has set accounting principles that remain about the same for all types of businesses. In this way, there's unity in all the procedures of business accounting to make sure that there's unity plus a clear understanding regardless of what type of business is being monitored.

That system is known as Generally Accepted Accounting Principles (GAAP). There's no law enforcing Generally Accepted Accounting Principles, though that might not matter when a company has to report losses or gains to the government or credit agency - or even face an audit.

Accounting Ratios

They help to uncover trends and conditions that are hard to find by examining individual components that form the ratio. Formulas like accounting ratios help accountants in coming up with the status and projections of a company. Accounting ratios have the following five main categories:

• Profitability ratios - Measure the ability of an organisation to turn a profit after it has paid expenses
• Liquidity ratios - Measure the company's liquid assets versus its liabilities
• Turnover ratios - Measure the efficiency of a business by comparing the cost of goods that were sold over a certain period against the inventory amount that was on hand at that same time
• Leverage ratios - Measure the company's total debt versus its assets and gauge equity
• Market-value ratios - Measure the economic status of a company compared with others in the industry

What Are the Many Layers of Accounting?

Generally, accounting isn't only one thing; in a business or corporation, there are many types or layers of accounting. In corporations and companies that are large, each of those layers could have their department that is staffed by many accountants who all take care of a small part. In businesses that are small, one tired accountant might be doing all the jobs. Specialisation includes the following:

• Taxes - This is obvious, all businesses have to pay taxes, and all businesses want to pay less in term of taxes as they possibly can: a good accountant ensures that happens.
• Payroll - Every business has to pay its employees, but more importantly, they've to pay payroll taxes, workman’s compensation, retirement, social security, etc. Payroll accountants take care of all this.
• Bookkeeping - Outflow goes in one column, income goes into another; if these two columns are out of order, so is the business. The bookkeeper does not have control over the business' money, but they ensure that all the transactions are recorded.
• Accounts Receivable and Accounts Payable - The bills that have to be paid (to suppliers, vendors, contractors) plus the payments coming in (from services, customers, clients) all must be processed. If payments do not come in, someone must alert collection; if payments do not go out, someone must take the fall.

Accounting and Technology

Computers do all this work in the 21st century and the knowledge of the technology that is underlying is extremely valuable in ensuring that everything gets recorded correctly. Today, many accountants specialise in this: accounting information technology.

Developing reports for the executives and management is one of the main jobs for accountants. That's where modern accounting technology comes into play; computers do analysis in just seconds that used to take accountants who are highly skilled weeks of research plus crunching. You can produce any kind of reports with only a push of a button, then a snapshot of the transactions as well as the cash flow are shown. All sorts of reports are required to gauge the success of the company:

• Retained Equity
• Assets and Liabilities Report
• Balance Sheets
• Profit and Loss Statement

All of these reports provide a clear picture of what the business is doing and where it's headed. They can help in deciding if the business is financially stable and also if there are adjustments that the company need to make in its operational strategies. These reports are also good for the investors; they can see if a business is worth investing in.

When things are not going right, it is time to call in accountants who are specifically trained to deal with kerfluffles and discrepancies: the auditors and forensic accountants. They are accountants with extensive education plus experience in investigation, they are trained to look for inconsistencies and patterns that may be a sign of criminal activity or only managerial incompetence. Either way, you do not want to see them coming through the door. However, if things are bad, they will clean it up.

Should I Become an Accountant?

It is easy to notice that accounting is a field that is multifaceted. If you consider accounting as simply a ledger and adding machine, you are thinking too small. It's like saying ultramarathon is just running or writing is simply moving a pen.

Accounting is a complicated discipline and a career path that is widely diverse and exciting. There is an abundance of career types as well as job opportunities that are available in the accounting sphere, and the field keeps growing every day. Above all, not everybody all can do it. There is a lot of mathematics involved in accounting, and honestly, it is the rare mind that's naturally good in mathematics. But more importantly, for you to make it as an accountant, you will need motivation, organisation plus a lot of smarts. It is a challenge that not many are prepared to take up. For those who are smart enough, determined and brave, accounting can be quite rewarding.