AIU Online: Acct. 205
January 13, 2015
Accounting is the process of keeping track of information transactions and analyzing financial information. Organizations divide accounting into two different branches, management accounting and financial accounting. Management accounting is used for internal use. It allows for private owners to make decisions based on that organizations finances. External financial accounting on the contrary, is used to create financial statements that will be viewed by a variety of outside people and organizations. This empowers current and/or potential investors to make decisions concerning their interaction with that organization. Some of the terminology found in financial reports may look foreign to a person lacking a background in accounting. However these terms mean a great deal to those who are aware of their meaning. Here are a few examples of the terms and even formulas found in financial reports.
The Accounting Equation Formula is: assets = liabilities + equity. Without knowing the
meaning of some of these terms one would never understand how the formula works. So lets break each of them down. Assets are anything of cash value that is owned by a person or organization. Liabilities are monies owed to creditors , services, vendors, etc. Equity is money that belongs to the owner or owners and investors after all debts in relation to the assets are paid off.
Now that we know how each of the terms operate within the equation, you may wonder how to keep the report accurate. The key to this is keeping what is called credit and debit entries in balance within the financial report. Credit account entries reflect a negative value for assets, and shows value for equity and liabilities. Debit entries show positive value for assets and negative value for equity and liability. More examples of terminology include net income, revenue, etc. These terms were just a...