10 things to know about accounting
Accounting skills play a very critical role in the decision-making of a business organization. As an owner, you must have the necessary knowledge about accounting; otherwise, your company will come to a standstill. Whether you own a small or big enterprise, there is no way you can operate it smoothly without being adequately well-versed in this all-important subject.
Accounting is a vast discipline. However, it does not mean you need to have a certificate in accounting before accounting starts making sense to you. You have to go through the below-listed features to get a reasonably good idea about accounting:
KNOWING THE BASICS OF ACCOUNTING
When you are in a business, you have to use certain words that are different from our everyday language. A sizeable proportion of these terms fall into the domain of accounting. You have to learn these words to develop a solid grip on accounting.
The difference between an owner’s assets and liabilities is known as equity. For example, if an owner has a share of 40000 dollars in a company, but he has liabilities of 20000 dollars on his credit, the owner’s equity would be 20000 dollars.
In the world of accounting, assets and liabilities could be in either tangible or intangible form.
Every business person tries his best to minimize the gap between liabilities and assets. The reason being, a robust share of equity means your organization can appease more investors and buyers.
Expenses cover all the money which is spent to extract revenue from the market. Accountants typically dub expenses as the cost of doing business. Expenses can be classed in the following four categories:
- Accrued expenses
- Variable expenses
- Operating expenses
- Fixed expenses
As already mentioned, liabilities are the amount a company owes. It could be anything from a loan, taxes, credit card balance, and so on.
In the strict accounting sense, the amount left after deducting the expenses required to run the company is called profit. Costs like labor wages, transportation, raw materials, inventory and suchlike are all subtracted to determine the overall bottom line of the respective company.
The worth of business assets does not always remain the same. Depreciation means the value your assets have lost over the passage of time. It is very important to take the depreciated value into account because it can help business owners to withdraw or reduce some taxes.
KNOWING THE FUNCTIONS OF ACCOUNTING
Accounting has many applications. Since you are now well-equipped with its basic terminology, you can fully understand its following functions.
- Managing financial data
The heading says it all. Accounting enables you to control the financial records of your company appropriately. Accountants have to exploit various tools, such as analytics reportings, algorithms, and data visualization, to get the job done.
The primary purpose of data management is to stay on top of legal obligations. A business organization must fulfill this criterion because a marginal mistake can lead you to pay hefty fines.
- Preparing balance sheet
A balance sheet is the blueprint of the financial health of a company. You don’t have to overwhelm an outsider about the standing of your company. All you have to do is to show him the balance sheet and he can quickly establish the financial footing of your company. That’s precisely why lenders commonly ask for a balance sheet when you apply for a loan.
Being an owner, when you look at the balance sheet, you can evaluate the potential risks in the near future and take timely measures to curb them. Moreover, the balance sheet keeps you updated about the liabilities and assets. You can’t go wrong in decision-making when you are well-informed about all the financial aspects of your company.
- Communicating financial insights
Just like the owner, employees should also be well-aware of the financial position of their company. Because sometimes the staff does not have enough time for consultation before making an important decision. Accounting makes it easier for all the employees to access the data in order to make on-the-spot decisions easily.
- Cost control
When companies are caught up in a tight financial spot, they usually take the help of an accountant to control the costs. If the accountant is the best in the business, he can minimize the operational costs to an alarming level.
Accounting teaches you to cut corners without compromising the overall performance. The reason behind this is that accountants give weight to stats instead of taking measures backed by plausible logic.
- Ensuring transparency
Though automation has made its way to businesses, the relevance of workers is still intact. It is one reason why employees are considered as the most precious asset of a company. Sometimes bad apples also break into the workplaces and shatter the trust of their bosses by indulging in fraudulent activities. Keeping an eye on the staff can keep the frauds at bay. Accounting aids companies to ensure transparency using different software.
The final verdict
Many companies fail to make their mark because they don’t invest in their accounting structure. Hiring an accounting is not going to suffice the needs; you also have to install the latest technology. Knowing that your accounting department is dealing with business operations in an efficient way, you can retire your mind to tranquility.