What Is Accounting

What is accounting? Accounting is the language of business. It’s purpose is to communicate the financial position and activities of an organization. When you learn and then understand accounting, you’ll be able communicate and understand the financial status of any type of organization, business, or operation.

The Accounting Equation

The accounting equation is important to understand before you try to learn the rest of accounting.

The financial information of any business or organization is basically split up into three main parts. These three parts are:

Operating Information

The operating information is what’s needed on a day-to-day basis in order for the organization function. Transactions such as purchasing supplies, paying vendors, paying employees, and recording sales are things that happen everyday and need to be recorded and tracked. The daily operations make up the majority of the accounting transactions, and they are the basis of the financial and managerial accounting information.

Financial Accounting Information

The financial information of an organization is the information that the stakeholders of a company are interested in. The stakeholders can be the owners, managers, shareholders, creditors, the government, the public, or anyone else that has an interest in the performance of the company. For example, the shareholders of the company (people that own stock in the company) want to know how well their investment is doing, and whether they should buy more shares or sell the shares that they’ve got. The managers of the company can use the financial accounting information to compare how their business is doing compared to the competition. The creditors of the company, such as banks or bondholders, can use the financial accounting information to determine if the company will be able to repay its loans.

Managerial Accounting Information

The managerial accounting information is the information that managers use to make decisions about the day to day operations of the business. The managers use this information primarily for planning, implementation, and control.

These three main sections of accounting are all part of the big picture. All of this accounting information is organized and put into specific financial statements that make it easy to understand the financial status of any given organization. There are 3 main financial statements that any public company is required to prepare:

The Balance Sheet

The balance sheet is a statement of an organization’s resources at any given point in time. It shows the relationship between the assets, liabilities, and equity of the organization.

The Income Statement

The income statement is just what it sounds like, it’s a report of the revenues and expenses of an organization within a given time period.

The Statement of Cash Flows

The statement of cash flows is also what it sounds like; a report of the organization’s cash as it flows in and out of the business.

The main purpose of accounting is to provide information that is useful and relevant to the interested parties so that they can make decisions about the company and it’s operations.

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