Basic Accounting Principles

Accounting — often called the language of business — is the process of recording, classifying, reporting and analyzing financial data. And while the accounting requirements of every business vary, all organizations need a way to keep track of their money. Unfortunately, there's very little that's intuitive about accounting. Many small businesses hire accountants to set up and keep their books. Other companies use accounting software like QuickBooks, Pastel, Brilliant and M.Y.O.B. Accounting and keep their accounting functions in house.

It's All about Balance
Using a system of debits and credits, called double-entry accounting, accountants use a general ledger to track money as it flows in and out of a business. They record each financial transaction on a balance sheet, which provides a snapshot of a business's financial condition. Accountants record every financial transaction in a way that keeps the following equation balanced:

Assets = Liabilities + Owner's Equity (Capital)

The Accounting Cycle Accounting is based on the periodic reporting of financial data. The basic accounting cycle includes:

Recording business transactions. Businesses keep a daily record of transactions in sales journals, cash-receipt journals or cash-disbursement journals.

Posting debits and credits to a general ledger. A general ledger is a summary of all business journals. An up-to-date general ledger shows current information about accounts payable, accounts receivable, owners' equity and other accounts.

Making adjustments to the general ledger. General-ledger adjustments let businesses account for items that don't get recorded in daily journals, such as bad debts, and accrued interest or taxes. By adjusting entries, businesses can match revenues with expenses within each accounting period.

Closing the books. After all revenues and expenses are accounted for, any net profit gets posted in the owners' equity account. Revenue and expense accounts are always brought to a zero balance before a new accounting cycle begins.

Preparing financial statements. At the end of a period, businesses prepare financial reports — income statements, statements of capital, balance sheets, cash-flow statements and other reports — that summarize all of the financial activity for that period.

The Importance of Financial Statements
At the end of a period — either annually or more frequently, depending on the length of a business's accounting cycle — accountants create financial statements that show the financial health (or decline) of a business.

Many people inside and outside a company use the information found in financial statements. Business owners and managers use the data in financial statements to chart the course of their companies, project revenues and expenses, monitor cash flow, keep tabs on costs and plan for the future. Present and prospective employees also want to see their employers' financial performance.

Stockholders and investors closely examine financial statements to check a company's performance. They want to compare a business's financial statements with those of other companies to guide their investment choices. Bankers look at a company's most recent financial statements when they make lending decisions.

Financial statements also make it easier to for accountants to prepare tax returns and report financial information to the South African Revenue Services. In fact, so many business partners, investors, and other interested parties rely on your these documents that it's important to get a handle on all the common financial reports your business will be expected to produce.

The day-to-day aspect of your financial management involves overseeing your business cash flow. We can assist with cash flow forecasts and analysis, allowing you to focus more on the operational side of your business.

Making Sense Of Financial Statements

Making Sense of Financial Statements

Day-to-day operations take up most of your time and energy, and you know you can't ignore the financial statements. You probably need some guidance in reading and making sense of them.

Financial statements are important because they can help to both uncover problems and identify corrective action. The most important financial statements are the balance sheet, the profit and loss (income) statement, and the cash-flow statement.
A balance sheet is nothing more than a list of the accumulated assets and liabilities incurred by the business. The difference between the two represents the net worth of the business. The profit and loss basically answers the question, "How did we do?" and the cash-flow statement answers the question, "Where was the cash used?"

Understanding these statements is crucial, since they all tell you what's happened in the past. But more important from a management perspective is what's going to happen in the future. Therefore, developing both a profit and loss forecast plan and a cash-flow forecast plan is essential to making the historical data more meaningful.

With a forecast in place, you'll have the ability to get data (via your financial statements) that tells you how you did compared with your plan. You should also be able to figure out what went wrong and how to correct any problems.

What Does Your Accountant Do ?

Probably the first thing you think of is that accountants keep the books — they keep the records of the financial activities of the business. But accountants perform other very critical, but less well-known, functions in a business:

Accountants carry out vital back-office operating functions that keep the business running smoothly and effectively — including payroll, cash inflows and cash payments, purchases and inventory, and property records.

Accountants prepare tax returns, including the federal income tax return for the business, as well as payroll and property tax returns.

Accountants determine how to measure and record the costs of products and how to allocate common costs among different departments and other organizational units of the business.

Accountants are the professional profit scorekeepers of the business world. They prepare reports for the managers of a business, which keep managers informed about costs and expenses, how sales are going, whether the cash balance is adequate, what the inventory situation is, and, the most important thing — accountants help managers understand on the reasons for changes in the bottom-line performance of a business.

Accountants prepare financial statements that help the owners and stockholders of a business understand where the business stands financially. Stockholders wouldn't invest in a business without a clear understanding of the financial health business, which regular financial reports (sometimes called the financials) provide.

Accountants provide the critical numbers to help business managers make good decisions, which keep a business on course toward its financial objectives. Accounting also involves bookkeeping, which refers to the painstaking and detailed recording of economic activity and business transactions. However, accounting is a much broader term that refers to the design of the bookkeeping system. It addresses the many problems in measuring the financial effects of economic activity and events and then communicating these economic measures of value and performance to non-accountants in a clear and concise manner — a diverse range of people need this accounting information to make good economic decisions.

Accountants design the internals controls in an accounting system, which serve to minimize errors in the large number of entries that a business records over the period. The internal controls that accountants design can detect and deter theft, embezzlement, fraud, and dishonest behavior of all kinds. In accounting, internal controls are the ounce of prevention that is worth a pound of cure.

Seldom does an accountant prepare a complete listing of all activities that took place during a period. Instead, he or she prepares a summary financial statement, which shows totals, not a complete listing of all the individual activities making up the total. Managers may occasionally need to search through a detailed list of all the specific transactions that make up the total, but this is not common. Most managers just want summary financial statements for the period — if they want to drill down into the details making up a total amount for the period, they can ask the accountant for this more detailed backup information. Also, outside investors usually only see these summary-level financial statements.