Accounting is a crucial process for the success of businesses large and small.Smaller businesses may only use a bookkeeper if they don't want a large accounting department with many employees.In a single-person business, the owner may need to handle the accounting on his own.Learning the basics of accounting can help you get started, whether you're trying to manage your own finances or want to work for another person's business.
Step 1: There is a difference between accounting and bookkeeping.
Accounting and Bookkeeping are often used in the same sentence.The skills and responsibilities of each person are different.Records of sales are kept and recorded in the books.Every dollar the business makes and spends is recorded by them.An accountant can also audit the business's books to ensure accuracy and proper reporting.Bookkeepers and accountants can work together to provide a full level of service to a business.A professional degree, state certification, or industry organization is used to formalize the distinction between the two.
Step 2: Become familiar with creating spreadsheets.
Microsoft excel and other spreadsheet software can be useful to accountants, as they help you track numbers in a graph or conduct calculations to create a finance spreadsheet.Even if you know the basics, you can always learn new skills to create spreadsheets, charts, and graphs.
Step 3: There are books about accounting.
You can find books on accounting at your local library or you can purchase a book from the bookseller of your choice.Entry-level books written by authors with experience in accounting will be more likely to contain researched information.An excellent primer for both general education purposes as well as for learners who intend to specialize in accounting can be found in Introduction to Accounting, by Pru Marriott, JR Edwards, and Howard J Mellett.College Accounting: A Career Approach is used in accounting and financial management courses.The book comes with a CD-ROM that can be useful for aspiring accountants.Thomas R. Ittelson's Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports is a good introduction to the field of accounting.
Step 4: You should take an accounting course.
If you want to take online courses in accounting for free, you can always check out your local community college.Try websites like Coursera or other online education platforms to find free courses taught by distinguished professionals in the field of accounting.Not everything can be learned in a course.
Step 5: Understand dual-entries.
Each transaction is recorded by the business and accountants make two or more entries.An identical decrease in one or more other accounts can be thought of as an increase.A payment made for a sale previously made on credit would result in an increase in the cash account and a decrease in Accounts Receivable for customers who have not yet paid.The amount of the sale would be the basis for these entries.
Step 6: Recording credits and debits is a good practice.
In the form of credits and debits, dual-entry records are made.Some accounts may be increased or decreased by a transaction.If you remember, the record goes in the left side of the account and the credit is on the right side.This refers to a standard t-account journal in which records are made on either side of the "T".Assets are Liabilities and owner's equity.This is the equation for accounting.Don't forget this above all else.It is a sort of guide to credits and debits.The account can be increased or decreased with the help of debits and credits.The opposite is true for the right side.When asset accounts are debited, they are increased.When liability accounts are debited, they decrease.Paying your electric bill or getting a cash payment from a customer are some common transactions.
Step 7: Establish and maintain a general ledger.
The dual-entry transaction are recorded in the general ledger.The relevant account within the ledger is where the individual records are made.A separate entry would be made in the accrued expenses account for the cash bill payment.When using accounting software, the process is much simpler, but can also be done by hand.
Step 8: There is a distinction between cash and accruals.
A cash transaction is when a customer buys a pack of gum from the store and you give them the gum in exchange for the cash.Accruals take into account things like credit, invoices, and billing, rather than direct payment at the time of business, as well as intangible assets like goodwill.
Step 9: Financial statements are created.
The current financial health of the business and its financial performance over the last accounting period are reflected in the financial statements.The general ledger contains information that is used to create the financial statements.The trial balance is created at the end of the accounting period.All accounts should have the same total debits and credits.The accountant must re-check the balances of each account if they are not.The accountant can enter summaries of the information contained in the financial statements when the accounts are adjusted and correct.As you study financial statements, you should aim to be able to create them on your own and identify what all of the numbers mean.
Step 10: You can learn how to make an income statement.
The most basic principle of accounting is an income statement.It records a company's profit margins over a period of time.The business's revenues and expenses are two of the factors that determine the income statement.Revenue is the inflow of cash in exchange for goods and services earned over time, but not necessarily the money paid to the company over that period of time.Cash transactions and accruals may be included in revenue.If accruals are included in the income statement, the revenue of a given week or month takes into account the invoices and bills that were sent out during that time, even if the money won't be collected until the next statement's period.Income statements are meant to show how profitable a business was, not how much money it took in.Expenses are any use of money to the company, regardless of the cost of materials and supplies.Expenses are reported during the period of time in which they were incurred, not when the company paid for them.The matching principle of accounting requires companies to match expenses and revenues in order to determine a company's actual profitability over time.In a successful business, this should result in a cause-and-effect relationship, where increased sales will increase the company's revenue while also resulting in business-related expenses: an increased need to buy more supplies for the store and an increase in expenses for sales
Step 11: A balance sheet is created.
Unlike an income statement, which deals with a period of time, a balance sheet is a snapshot of your business at a particular point in time.At a given point in time, the business's assets, liabilities, and stockholders' equity are all important components of a balance sheet.It would be helpful to think of the balance equation in terms of assets being equal to liabilities and owner's equity.What you have is always determined by what you owe and what is currently yours to keep.A company's assets are what they own.It may be helpful to think of assets as all of the resources a company has at its disposal, such as vehicles, cash, supplies, and equipment.Assets can be tangible and intangible.At the time of the balance sheet's creation, Liabilities are any amount that is owed to others.Liabilities can include loans that must be paid back, any money that is owed for supplies given on credit, and wages that have not been paid.Equity is the difference between assets and liabilities.The "book value" of a company is sometimes referred to as equity.If the business is owned by one person, then the equity is an owner's equity.
Step 12: A statement of cash flows can be created.
A cash flows statement shows how cash has been generated and used by a business, as well as that business' investing and financing activities over a specified period of time.Balance sheets and income statements are used to derive the statement of cash flows.
Step 13: Follow the accounting principles.
The basic principles that guide accounting practices rely on a set of principles and assumptions designed to guarantee transparency and integrity in all business transactions.The Economic Entity Assumption requires an accountant to maintain a separate ledger for business transactions that do not include the business owner's personal expenses.The agreement that economic activity in the United States will be measured in US currency is known as the Monetary Unit Assumption.The Time Period Assumption is an agreement that all business transactions will be recorded accurately.At the very least an annual report is made, though reports are often made at weekly intervals in many companies.The time interval must be specified in the report.It's not enough to include the date of the report, an accountant must clarify in that report whether it corresponds to one week, one month, or one year.The amount of money spent at the time of a transaction is referred to as the cost principle.The Full Disclosure Principle requires accountants to give relevant financial information to interested parties.The body of a financial statement or the notes at the end of that statement must contain this information.The Going Concern Principle assumes that the company will remain in operation for the foreseeable future, and requires the accountant to disclose any information regarding the compromised future or certain failure of a company.If an accountant believes the company will go bankrupt in the future, he is obligated to give the information to investors.Expenses and revenues must be included in all financial reports.The revenue will be recorded as having happened at the time of the transaction, not when the money is actually paid to the business.Accountants can use materiality to determine whether or not a given amount is insignificant to the report.An accountant's decision to round to the nearest dollar does not mean that an accountant will report inaccurately.Conservatism advises that an accountant should report potential losses for a business, but not actual gains, since he has an obligation to do so.This is to make sure investors don't have an inaccurate picture of the company's financial situation.
Step 14: The rules and standards of the board.
The rules and standards laid out by the FASB aim to ensure that interested parties have reliable, accurate information and that accountants work ethically and report honestly.The conceptual framework of the FASB can be found on the website.
Step 15: Follow the accepted industry practices.
Expectations that working accountants have of other accountants help guide the industry.The reliability, verifiability, and objectivity principles require accountants to report on numbers that other accountants agree on.This is for the professional dignity of the accountant and to make sure that any future transactions are fair and honest.Consistency is a requirement for an account to apply various practices and procedures to a financial report.If a business makes a change to its cost flow assumption, the accountant has an obligation to report it.Comparability requires accountants to conform to certain standards, such as the generally accepted accounting principles, to ensure that one company's financial reports can be easily compared to another.