Accounting

Accounting is recording, classifying, summarising, and interpreting financial transactions to provide Management and other interested parties with the information they need to make correct financial decisions. Accounting process consists of two parts: bookkeeping, that is mechanical process of recording, classifying, and posting financial entries into the ledger; and accounting itself, that is interpreting of financial data, making financial statements; designing accounting information system within a business and advising Management on financial matters. Accounting deals with accounts, that is financial entries grouped together by common characteristics:

Assets (everything that a business owns: buildings, equipment, machinery, land -fixed assets; money, cash, accounts receivable - current assets).

Liabilities (obligations, debts of a business, what it owes to creditors, banks, suppliers, investors, customers, so on).

Owners' equity (capital which the owner will receive if he sells all assets and pays all his liabilities. O. eq. = Assets - Liabilities).

Revenues (incoming money, or gross income, or profit before taxes).

Expenses (outgoing money: salary and wages, rent, travelling and entertainment expenses).

The system of bookkeeping is based on the principle of the double entry, which means that each transaction is entered twice, as a credit in one account and as a debit in another account. For example, if we buy something for cash, the merchandise account is increased (a debit), and cash account is decreased (a credit). If it is bought on credit, a liability will be created and the liability account will be increased (a credit). If we deposit $100 with a bank, for example, the bank enters a debit for the receiver and a credit for the giver. The former represents an asset to the bank, since it is a sum of money at the bank's disposal, as well as a liability, since it will one day have to be repaid. The whole system is always in balance.

Accounting can be classified into two categories: financial accounting and managerial accounting.

Financial accounting generates reports and communicates them to external decision makers (stockholders, creditors, customers, suppliers, financial analysts) so that they can evaluate how well the business works. These reports are called financial statements, they relate to the financial position, liquidity (that is, ability to convert to cash), and profitability of an enterprise.

Managerial accounting provides internal decision makers who are charged with profitability and liquidity of their business with information about financing, investing and operating activities. Managers and employees need information that tells them how they have done in the past and what they can expect in the future.

The final products of accounting are financial statements: Balance Sheet, that shows financial position of a business at a definite point of time, and Income Statement (GB: Profit and Loss Account), that shows financial position of a business over a definite period of time: month, quarter, year.

Accounting is done by accountants. Highly qualified accountants (in the USA -CPA, i.e. certified public accountant; in GB - CA, i.e. charted accountant) can perform audit.