The Basics Of Accounting, Assets And Liabilities
Posted By tsauthor on May 19, 2011
Most of us doubtless think of accounting and Bookeeping as being essentially the same, but in actual fact bookkeeping is a subcategory of accounting, where accounting includes additional financial processes which support the running of a business. It can be more easily explained that accountants generate financial summaries that are a direct result of the reports created by bookkeepers.
Bookkeepers perform all manner of record-keeping tasks. So what the bookkeepers do is setup and organize what’s known as the source documentation for all the financial aspects for any given company: this will include payments and collections, as well as all the purchases, cash transferals and sales. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. The bookkeepers are also the people that calculate what are known as the ‘financial effects’ of all the fiscal transactions that the business undertakes. Examples of what that might include are: working out the payroll, buying the raw materials to create products and calculating sales.
Bookkeepers also make entries of the financial effects into journals and accounts. These are two dissimilar types of record. A journal is the record of transactions in chronological order. An account is a separate record, or page for each asset and each liability. One transaction can affect several accounts.
Bookkeepers prepare reports at the end of a specific period of time, such as daily, weekly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they’re as error-free as possible.
The bookkeepers must also undertake detailed tracking reports of all the financial accounts. This report is named the adjusted trial balance. While a small or local business may only have a dozen or so accounts, larger businesses will typically have thousands accounts of this nature.
The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a summarized close.
Assets and Liabilities
Making a profit in a business is derived from several different areas. This is not as straightforward as it may sound because, just as our personal finances are usually run on credit, so it is in the business world. Many businesses sell their products to their customers on credit. Accountants use an asset account called accounts receivable to record the total amount owed to the business by its customers who haven’t paid the balance in full yet. Frequently a company will not be able to consolidate all its receivables by the end of the fiscal year; this is more likely to be true for financial transactions that were conducted towards the end of the financial year.
The Accountant reconciles the sales profits against the cost of goods sold during the year when these products where actually delivered to the client. This kind of record is called accrual based accounting which tracks the actual time revenue was generated against accrued expenses, for example for the cost of raw materials. When sales are made on credit, the accounts receivable asset account is increased. In a similar way, when cash is obtained from the client, the cash account is updated and the accounts receivable account is decreased accordingly.
When the business acquires products, the cost of them goes into what’s called an inventory asset account. This cost is then taken out of the cash account, or added to the accounts payable liability account based on whether the company was paid with cash or with credit.
The cost of goods sold is one of the major expenses of a businesses that sell goods, products or services. Even a service company involves some kind of expenses. A business makes its profit by selling its products at prices high enough to cover the cost of producing them, the costs of running the business, the interest on any money they’ve borrowed and income taxes, with money left over for profit.
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