The word accounting comes from the word accountability. If you are going to be rich, you need to be accountable for your money. Robert T Kiyosaki
Are you accountable for your money? Are you planning on becoming an accountant? Do you admire other accountants?
Well, you might have heard about accounting and how rich accountants are. You may even be deciding to become an accountant. However, are you clear as to what the accounting fundamentals are. Do you know what it is that an accountant really does? Once you begin to understand the accounting fundamentals and get to know more about accounting, you will begin to realise if accounting is really for you or not.
Before you enough explore the fundamentals of accounting, you need to understand the basics of accounting.
If you want to read the fundamentals of accounting, read the golden rules of accounting.
Basics of Accounting
To understand the basics of accounting, you need to be able to find a definition for accounting. Before we explore the definitions of accounting, consider reading our article on an introduction to accounting.
It is hard to come up with a set definition of the concept of accounting. However, accounting lecturers tend to give us their understanding of what the term accounting is.
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The Economic Times
The Economic Times defines accounting as the process of measuring, sharing and documenting financial information. Further definition from The Economic Times is that accounting is the most important thing businesses can do. Accountants have to follow Generally Accepted Accounting Principles (GAAP).
Investigating Answers
According to Investigating Answers, accounting refers to a process of systematic recording, measuring and communicating financial information. Furthermore, it is believed that in order to do basic accounting, you need to understand financial investments.
From both the definitions of basic accounting, it is clear that accounting is both measuring and speaking about financial information that has been observed.
If we are talking about the basics of accounting, the basic accounting equation is what comes to mind. If you know the accounting equation, you know the basic principles of accounting.
So, what is accounting defined?
By analysing the keywords linked to the definitions of accounting, you will notice that accounting is all about analysing, identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating.
In other words, the basics of accounting refer to the number crunching work conducted by accountants who possess the necessary numerical skills when they enter the accounting field.
With the necessary numerical skills, accountants can communicate business related decisions and summarize future financial plans.
What is Accounting About?
When we look at how Forbes describes accounting, we note that accounting is like a powerful machine where raw information (input data) gets processed into the form of financial statements. If accounting is that powerful machine as has been described by Forbes, accountants are considered to be the vital asset needed in order to run a business smoothly.
Accounting refers to a job whereby financial records produced need to analysed in an ethical and unbiased way. Accounting entails more than just the analysis of financial statements, it includes looking at taxes and issues with regard to taxes, auditing, and looking at predicting future business decisions and transactions.
Accounting is all about having accredited accountants who busy themselves day to day by:
• Managing financial systems and budgets using spreadsheets and accounting programs
• Undertaking financial audits
• Liaising with clients to provide financial information and advice
Accounting Types
Within a business, two types of accountancy exist: financial and management accountancy.
Management accounting
People who choose to busy themselves with management accounting tend to work internally to provide financial information. People who busy themselves with management accounting provide respective details to management to aid them with their decision making that is often led by accounting systems and accounting practices.
Management accounting entails getting involved with certain tasks such as budget analysis, financial planning and forecasting. Management accounting deals with future financial planning.
Financial accounting
Financial accounting is the process of providing information to external bodies, like the shareholders, investors and creditors. Financial accounting tends to focus on summarising the company's financial positioning and reporting on company-related issues. Financial accounting deals with condensing a company's current financial position and reporting on issues such as the company's profitability, liquidity, solvency and stability. Financial accounting is required by law.
When you graduate as a financial accountant, you might start off in the financial accounting field.
If we go with the analogy of accounting being a machine, accountants are roped in to assess what is working and what is not working. If something is not working in a company, this can surely be fixed.
Again, accounting is essential as it provides insight as to whether the company is making profit or not. If your organisation is running at a loss, it is the accountants within the business who can pick this up.
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What is Owner's Equity?
Now that you understand what financial accounting is and what management accounting is, you need to consider what owner's equity is. Owner's equity refers to all that the owner owns in a business. When we look at the term, "equity," from the broader term, "owner's equity," we understand that equity stands for what someone owns or what is of value to someone.
When an owner starts a business, the owner's equity will at first be the amount that an owner has invested in the business. Again, owner's equity is usually used to describe a business owned by a sole proprietor.
If you are an accountant in a business owned by a single owner, you need to make sure to monitor all the activities in the business. You must remember further capital contributions as well as increases in profits tend to increase owner's equity as well.
When it comes to owner's equity, it refers to rights that owners have to all of those assets in a business. When you subtract all the liabilities that a business has from its assets, you will get owner's equity. To find the owner's equity in a business, you must study the balance sheet of a business. On the left of the balance sheet are the assets or anything of value that the business owns. On the right of the balance sheet are the liabilities.
It is important to know the owner's equity at all times in a business. It is also equally as important to know the equity interest in a business. Equity interest refers the ownership interest in a business entity. Shareholders are believed to have equity interest as they buy share within a business and in turn partake in the ownership of that business.
Accountants within a business seek to increase owner's equity. Owner's equity can be increased by either increasing profits or by convincing the respective investors to invest more within a particular business.
To learn more, you need to look at what is accounting in business?
What are Accounting Fundamentals?
If you have ever dreamt about being an accountant, you may be all the more intrigued by the basics of accounting as well as the fundamentals of accounting. When you start pursuing accounting studies, you get to grips with the basics of accounting. However, practical experience usually helps you to understand accounting fundamentals.
There are about 5 fundamental principles in accounting. Only once you start your job as an accountant, do you actually understand what the real accounting fundamentals are.
- Accountants need to deal with all matters with integrity. It is an accountant's duty to distance himself or herself from any document that contains misleading information or information that is not correct.
- Accountants need to remain objective in their dealings at all times. Objectivity is key and accountants need to make judgement calls that are fair, unbiased and free from any personal conflicts or pressure from outside.
- Accountants need to act with professional competence at all times. Generally Acceptable Accounting Principles (GAAP principles) are necessary in order to ensure that accountants provide competent and professional services at all times. Professionalism is key in the field of accountancy and accountants need to make sure that they are staying abreast of any new knowledge at all times.
- Accountants swear to be confidential at all times and to not disclose any private information. Proper procedures always need to be followed by accountants and accountants need to know how much to disclose and how much to hide.
- A key fundamental principle is that accountants need to act professionally at all times. This is of utmost importance, especially when accountants are interacting with or dealing with clients.
Now that you understand accounting fundamentals, you can decide whether you are ready to start your journey as an accountant or not. You can always reach out to a Superprof accounting tutor to guide you as to what to expect once you start studying accounting, or even as you approach the end of your accounting studies.
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