Friday, September 14, 2012

What is accounting?

Some non-business friends of mine came to me and ask me: what is accounting?

Accounting is a system/ mechanic used to record (i.e. account) transactions of a business. To illustrate, an owner of a small-business-enterprise records its daily revenue information. At the end of every period (e.g. end of every month, end of every year), the accounting information is accumulated and summarised in a report, i.e. balance sheet statement, income statement, cash flow statement.

Management can determine business decision based on balance sheet statement/ income statement. The financial statements prepared reflect the financial state of affairs and performance of a business. Financial statement users make decisions based on the financil statements

There is a systematic method to account for the transactions to ensure consistencies in recording the transactions. Consistency allowed the readers of accounting records to make useful comparison to understand the changes of a business between the comparative period.

Understanding accounting / financial statements is crucial in understanding a business crucially. It is important for every single investor to appreciate the accounting.

1 comment:

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