THE PROBLEM AND ITS SETTINGS
Most of the world’s work is done through organization – groups of people who work together to accomplish one or more objectives. In doing its work, an organization uses resources – labor, materials, various services, building and equipment. These resources need to be financed, or paid for to work effectively, the people in organization need information about the amounts to these resources, the means of financing them, and the results achieved through using them. Parties outside the organization need similar information to make judgments about the organization.
Human beings have limitations. Everyday transactions cannot be retained in the human brain for quite a period of time without confusions and complications. To avoid these, transactions and other important events should be recorded. Such written records serve as reference in the future.
As a small business owner you just need to know the accounting basic principles. As your business grows, you can jump into the deep end of the accounting pool with ratios and monetary unit assumptions later. Let’s just get our feet wet first because accounting is one of the most important components of your small business. Without it you are just setting yourself up for failure.
The most basic definition of accounting is the documentation of a transaction. Paying your website fee affects your small business’s financial condition because it would then have less cash on hand. Such an economic event or condition that directly changes your business’s financial condition is a financial (business) transaction. All business transactions can be stated in terms of changes in the three elements of this accounting basic equation which is to the base of all accounting: Assets = Liabilities + Owner’s Equity
However, this format is difficult to use when multiple transactions must be recorded daily. Therefore, accounting basic systems are designed to show the increases and decreases in each financial statement item in a separate record. This record is called an account. For example, since cash appears on the all balance sheets, a separate record is kept of the increases and decreases in cash. Likewise, a separate record is kept of the increases and decreases for supplies, equipment, notes payable and other balance sheet items. Similar records would be kept for income statement items, such as revenue, wage expenses, rent expenses, etc. A group of accounts which contains all of the balance sheet and income statement accounts is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts are usually listed in the order in which they appear in the financial statements. The balance sheet accounts are usually listed first, in the order of assets, liabilities, and fund equity. The income statement accounts are then listed in the order of revenues and expenses. Assets are resources you own. Examples of assets include cash, account receivables(money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for), supplies, prepaid expenses (such as insurance) buildings, equipment, and land. Liabilities are debts owed. Liabilities are often identified on the balance sheet by titles that include the word payable. Examples of liabilities include: accounts payable (money owed to vendors for products and services purchased on credit), notes payable and wages payable. Equity is the owner’s right to the assets of their business. Revenues are increases in the owner’s equity. Examples of revenue include sales and commissions. Expenses are assets used up or services consumed in the process of operating your business. Examples of typical expenses include wage expense, rent expense, utilities expense, supplies expense, and miscellaneous expense. A chart of accounts is...