Basic Accounting

Accounting is the language of business. So, eventhough you're not an accountant, if you're self-employed or planning to start a business of your own, it is important that you understand the basics of accounting.

According to the Wikipedia, accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it. Put simply, accounting provides information about the financial position of a company. This financial information, in turn, is used in making decisions that will affect the operation of the company.

As a process, accounting has four different functions, these include recording, classifying, summarizing and interpreting. Recording involves listing financial transactions in a journal. If the company was able to collect a fee for a service rendered or a product sold, it should be listed in the journal.

The second function of accounting is classifying. Financial transactions have to be grouped based on their respective accounts. Accounts are classified as assets, liabilities, capital, revenue or expenses. Assets are the resources of the company or the things that a company owns. Assets are categorized into current assets and fixed assets. Current assets are items that could be converted to cash in less than one year. Examples of current assets include cash, accounts receivable, prepaid expenses and marketable securities. Fixed assets or plant assets, on the other hand, are tangible assets held for business use and not expected to be converted to cash in the current fiscal year. Examples of fixed assets are land and equipment. Liabilities are debts or financial obligations and are sometimes called payables. Capital is the investment made by the owner in the company, while revenue is the company's income. Expenses are the money spent by the company to continue its ongoing operations.

Another function of accounting is summarizing. Once recorded and classified, financial transactions are summarized to form financial reports such as income statement and balance sheet. Financial reports are then analyzed and interpreted. As what have been mentioned, interpreting is a function of accounting. Interpreting financial reports is crucial in making business plans.