The different transactions taking place in a company have certain effects in the finances of that company. The financial condition of any company is judged according to different elements present in its balance sheet. Assets in a company are those resources that a particular entity owns. Liabilities are on the other hand like obligations that an entity owes to another. An owner’s equity shows amounts invested by an entity plus the amount retained. To put it simply, it is an excess when assets and liabilities are measured. It is shown clearly by equation of accounting where assets equal to liability plus equity.
Double entry bookkeeping
One might say that the equation of accounting is like a foundation for double entry based bookkeeping system. Different transactions and financial reports must show that total debits will be equal to the total credits. Therefore, a balance is maintained between the two things. There is a set of rules which are used for recording financial information. It can be said that according to these principles, every credit entry will have a subsequent credit entry. All transactions therefore have two entries where credit amount will always be equal to amount of debit. For more about the double entry bookkeeping system you can read more by clicking here.
More about accounting
It can be said that accounting is work concerning management of numbers and other such finances. Managing books associated with companies and controlling monetary flow, of an individual or company is a part of accounting. Accounting principles form a core part of this kind of management. Different companies need to keep these principles in mind while they prepare their annual financial reports. These principles are often found to be within realms of GAAP. FASB as well as IASB are also two standards that companies are following at the present time. If you need assistance or help in accounting, you can talk to accounting experts as well.
Some principles
According to cost principle, companies should only state their assets, liabilities and equities along with original purchase costs. Going by accrual principle, one needs to keep a record of financial transactions as soon as they occur. You should not be waiting till preparation of cash flow system for keeping those records. According to consistency principle, a company is required to continuously make use of a principle till the best version arrives. If this is not followed, then that company would be facing long term financial problems. A different transaction of a firm needs to be maintained in books different from owners. This ensures that no confusion arises regarding maintenance of different accounts so that there is no mix up.
Full disclosure
Going by principle associated with full disclosure, important information other than financial statements need to be mentioned for all readers. This information helps in gauging financial condition of companies better. When revenue gets recorded other expenses concerned with that revenue should be shown. This helps in managing accounts very comfortably and constitutes accrual accounting to a large extent. If you go through materiality principle, it tells that transactions need to be recorded according to their nature. If transactions do not get recorded regularly, then it will adversely affect management of finances within the company.
Monetary unit and reliability
The transactions present in accounting books, needs to be in terms of currency units only. This really helps in matching different purchases with transactions on course of an accounting window. Values associated with assets and liabilities are therefore calculated without any problems. Using reliability principle, only those transactions are stated which have sufficient proof to back them. The recipe got from shopkeeper can act as a proof for purchase. Transactions are also backed in this manner. Different companies need to report results associated their way of operating within stipulated duration of time. This really helps in maintaining fortune of companies.
Crunching numbers
The field of accounting can be referred to as one which is greatly misunderstood. Going by general conception, it is completely crunching of numbers. There is certainly number crunching, however other than technical skills one also needs to be good in dealing with people to succeed in accounting. A very systematic approach is followed for recording, classifying and interpreting results of all calculations. It is a complete system related to information.
Some terminologies
The owner’s equity refers to the amount of money deposited by owner belonging to a business. There exist different kinds of assets having some kind of monetary values. Current assets refer to those which have been stored for a short duration of time generally to convert to cash later on. The non-current assets are there for long term and are generally not disposed of in the next quarter. Liabilities can be termed as certain obligations which come from some past transactions. Current liabilities can be paid off in the near future. The different non-current liabilities are generally payable after certain duration of time.
Income and expense cycle
Income is the amount of money that people receive for his service during a certain period of time. Expense on the other hand is that amount spent for selling off certain services or goods. In one operating cycle, one will observe average period of time needed for businesses to spend cash and produce new goods. Those expenses which can be attributed directly to sales is known as direct expense, whereas in indirect expense, the money cannot be directly attributed to sales. A debtor would be owing money to a company where a creditor is a person to whom a company owes money. For every turnover for a company, it suffers a certain amount of profit or loss too.
Cost accounting
This can be referred to as identification and recording of expenditure and determine different costs of various products. The management of a company is also presented with data in order to control and guide the management in a certain way. Cost regarding all jobs, contracts as well as service gets ascertained by help of it. With this kind of knowledge, it becomes easier to plan producing as well as selling certain products. There are certain standards with which comparison of costs are made.
Features associated Cost Accounting
Here you will find a process for accounting related to costs. Different income as well as expenditure associated with these goods and services is also recorded here. A lot of data is also obtained from here for estimation of budgets in future. Income plus expenditure associated with products are recorded with the help of this. You will only find right information being presented so that it can help out the management.
Different objectives of cost accounting
Per unit cost associated with any manufactured product gets ascertained by help of this kind of accounting. Wastage reports associated with manufacture of a product is disclosed. This really aids in controlling all wastages in the future. Thus a fixed price for a product can be agreed upon for everyone. Once all kinds of costs are ascertained, companies can look for expansion policies too. Data associated with nay company, is presented in a really precise and clear manner with help of this kind of accounting.
How accounting is important for different parties?
Prices of different products, is decided with help of cost accounting. All costs associated with a product is known with help of this kind of accounting. Investors are always quite eager to know about financial condition of a company and how much it is earning. This information is presented to them with help of this accounting. Wages of employees get decided in terms of data presented by a cost accountant. Different data which are obtained here, are extremely reliable in nature. Governments are therefore able to determine excise duty as well as income tax being levied. Different policies of governments are also determined with help of this.
Financial accounting
Through financial accounting, people aim to find out results of an accounting year in terms of profit and loss statements, ultimately resulting in a balance sheet. Control of costs or its reduction is not really looked after by financial accounting. Different transactions are recorded here only in terms of money. Past data associated with a company is looked after by financial accountants. The information obtained from here, is used by financial institutions as well as investors and creditors. Financial information is prepared and available after a period of one year whereas cost accounting is performed as and when required.
Management based accounting
The primary objective observed here is providing some data to management of a company regarding planning and controlling workings of a company. Here quantitative as well as qualitative kinds of data are used for making decisions. With availability of many different data types, people ensure that a company would be performing in a really efficient manner. Data being used here is taken from cost as well as financial accounting. Auditing is not deemed to be done here mandatorily.
Financial ratios
If you are looking to make some investment, then analysis of different financial statement is really important. There are lots of numbers in financial statement of any company. Therefore, this can be a really puzzling and difficult affair for investors. By analysis done using financial ratios, it becomes quite easy to organize all numbers. This tool for ratio analysis helps in easy understanding of different financial results. You will also gain some insight about spotting trends. These trends actually give quick indication of performance of a particular company.
Calculation
Financial ratios can be referred to as ratios of values taken from financial statement of any company. Almost all the financial ratios can be calculated from information provided in financial statement of a company. Ratios are used for analysis of trends as well as look into comparison with other companies. This data type is usually used by managers of a firm or even interested shareholders. Different strengths as well as weaknesses of a company is determined with use of these ratios. Performance of a company over subsequent years is therefore found out easily using such ratios. Management can therefore become really efficient using these ratios.
Ratio of profit
Profitability ratios, gives you an indication of how successful a particular firm has been in generation of profits in a financial year. These profits get generated with help of a company’s assets as well as the manner in which expenses has been handled. Gross profit can be measured on sales of goods of a company. By return of assets ratio, it is measured, how effectively a firm’s assets are being used for garnering the profits. For different shareholders, return to equity ratio is extremely important. Profits are measured on each unit of money being invested in stocks of a particular company.
Liquidity ratios
These ratios provide information about how capable a firm is about meeting financial obligations on a short term basis. This information is really important to those people who are giving short term credit to that firm. A current ratio is essentially one involving current assets and current liabilities. In quick ratios, liquidity is measured excluding inventories present in current assets. Cash ratio has often been termed as a really conservative form of liquyidity ratio. It shows how capable a firm is in paying off current liabilities associated with that firm. There might be situations, when a company is required to pay off the money at a short notice.
Activity ratio
When
you have an idea about receivable turnover, you get to know the speed with
which a company would be able to collect accounts that it deserves to receive
over time. This turnover gets collected according to the number of days within
which the collections are made. This period is known as collection period. If
solvency of a firm is needed to be known on a long term basis, then debt ratio
tells all about it. This is completely different from liquidity ratios.
Author Bio:
Eoforhild Heathe is a name that has grown really popular among accountancy and finance students over the years. She is an excellent teacher who has completed her MBA from the University of Chicago. She has managerial experience of working in accountancy firms. She teaches students all about finance in an easy manner.
