Accounting Concepts
Accounting Basics
Important Disclaimer
Important Note: The text in this chapter is intended to clarify business-related concepts. It is not intended nor can it replace formal legal advice. Before taking any actions relating to your business, always consult your accountant or a business law/tax attorney.
The Need for Accounting
Every organization needs to maintain good records to track how much money they have, where it came from, and how they spend it. These records are maintained by using an accounting system.
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These records are essential because they can answer such important questions as:
• Am I making or losing money from my business?
• How much am I worth?
• Should I put more money in my business or sell it and go into another business?
• How much is owed to me, and how much do I owe?
• How can I change the way I operate to make more profit?
Even if you do not own or run a business, as an accountant you will be asked to provide the valuable information needed to assist management in the decision making process. In addition, these records are invaluable for filing your organizations tax returns.
The modern method of accounting is based on the system created by an Italian monk Fra Luca Pacioli. He developed this system over 500 years ago. This great and scientific system was so well designed that even modern accounting principles are based on it.
In the past, many businesses maintained their records manually in books – hence the term “bookkeeping” came about. This method of keeping manual records was cumbersome, slow, and prone to human errors of translation.
A faster, more organized, and easier method of maintaining books is using Computerized Accounting Programs. With the decrease in the price of computers and accounting programs, this method of keeping books has become very popular.
Accounting and Business
Accounting is the system a company uses to measure its financial performance by noting and classifying all the transactions like sales, purchases, assets, and liabilities in a manner that adheres to certain accepted standard formats. It helps to evaluate a Companys past performance, present condition, and future prospects.
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A more formal definition of accounting is the art of recording, classifying, and summarizing in a significant