Financial Magazine

Financial Education

Is accounting Important?

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The term accounting is thrown around a lot in business, but what exactly doses accounting entail, and what is its place in the modern contemporary business? The textbook definition of the term accounting is that it is the collection, organization and interpretation of financial data. However, to understand accounting, it is important to go much deeper than the textbook definition allows. Regardless of one’s business, it is often said that every successful business must operate within the same principles of modern accounting. The oldest accounting principles have been around ever since the 1800s. Even though the profession evolves with the time, the following basic principles have always remained the same;

The first principle is the revenue principle. This is the point in time when business owners can record a business transaction in their books as revenue. The revenue principle states that business revenue is earned at the point of sale, which is at the point when the buyer takes legal possession of the item sold, and not necessarily the point at which cash for the transaction is accepted by the person selling. The expense principle describes the point in time when a transaction may be recorded as an expense. Expense occurs at a time when goods are received or service is performed, and not necessarily when the business is billed or when the payment for the services is made.

The matching principle, the third important accounting principle states that one should always match items of expense with those of revenue. The fourth accounting principle is the cost principle, which states that businesses should use the historical cost of items in their books, and not the resell or fair market value. The final important principle, the objectivity principle, states that one should always use only factual, verifiable data, instead of the subjective measurement of values. This should happen even if the subjective data seems more attractive that the verifiable data.

These are just the core principle, and the intricacies of accounting might be a little more complex. Basically, accounting generates some key documents, including profit and loss statements showing the trade for a specific period, as well as the balance sheets. The accounting process often requires the measurement, summary and interpretation of financial information, and the communication of this summarized information to stakeholders.

In the business world, a basic grasp of accounting is important because it is useful at almost all levels. For instance, the secretary will require basic accounting knowledge to manage company cheque books and orders, while auditors have to study the financial statements of the business to determine the integrity of the business and the accuracy of the records. The business executives at the highest levels require past and current accounting information to study the trends in the business, as well as make reports to current and potential investors.

Another important reason why the grasp of accounting is important is because it forms the core of business credibility. The past decade or so has seen the world of business hit by many scandals like the Enron and the WorldCom issues. The biggest, perhaps, was the global financial crisis, and the resulting inadequacies that it unearthed in the finance sector. Ever since, businesses have held themselves, and have been held to higher standards as far as accountability is concerned. Business stakeholders, the public, investors and governing bodies now hold much stricter views on accountability, and it all begins with the grasp of accounting knowledge.

Away from the workplace, the basic principles, or the ideas behind them, are important for everyone in their daily lives. Every day, people make investment decisions, calculating what to pay for mortgages, what to spend on rent, entertainment, food and so on in relation to their salary. Many do not realize it, but the principles of accounting that are used to great depth in business can be very helpful when applied to personal financial decisions.

The biggest place accounting has in business is its influence on business decisions. Accounting generates information that influences both internal and external decisions. Without financial accounting, it is impossible to get snapshot of such information as assets and liabilities, debts, equity, profits and losses. Without this information, it is impossible for businesses to make important decisions about their direction going into the future. One cannot know whether what they have been doing is right without monitoring the results.

With the right set of results, management accounting has been known to provide benchmarks for the motivation of employees, managers and executives. Knowing where one is means they know how much they need to do to get to where they feel they should be. Accounting information also influences external decisions, such as whether to buy or invest in a company, or stay away from the risk it carries. Accounting is the most basic framework of business. Without it, nobody can face the business challenges of the outside world.

How Can You Learn More About Finance?

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One of the most profound statistics today is the number of millennials that are still being supported financially by their parents or guardians. It has been suggested that to avoid this, one should have mastered the following financial principles before the age of 20.

Being tight fisted with funds: a single dollar has incredible value, but many people never realize the true value of the single dollar until their expenses add up. Saving begins with checking the small expenses like fast food and candy when filling up one’s tank. Another important financial principle is that of credit score. It can be the difference between, say, leasing or missing out on an apartment. It is also important to keep one’s overhead low, getting rid of the elements in the budget that are not true needs, and switching to being frugal. These might seem like run off the mill suggestions, but they require a certain level of financial knowledge and competence to consistently pull off.

Not everyone can confidently say they had these principles grasped by age 20, let alone at whatever age they might be. Understanding the small things translates to a greater understanding when the big decisions are to be made. Becoming a financial expert seems difficult without necessarily having studied it in school. However, from the basic introduction to personal finances to the more advanced security analysis, anyone truly interested in finance can learn. Here are some clever tips on how to go about the process.

Read

The first step is to read as widely as possible on the subject of finance. There are no shortcuts, and one simply has to start from the bottom up. A useful suggestion of where to start is with the book “the richest man in Babylon”. A simple and easy to read rendition, it is the perfect introduction to finance for the beginner. Other texts that might be helpful include the ‘for dummies’ series, especially the ones that deal with the subjects of personal finance, mutual funds and budgeting.

As one grows their knowledge, they will likely have identified possible areas of specialization or one they would like to learn more about. With a specialty area chosen, the internet has numerous resources. Websites like investopedia offer useful information. Search engines help the learner hone in on specific topics. Additionally, there are many financial service companies whose websites offer a wealth of information. One might also consider the local bookstore or library for information.

Media

Television and radio also offer a wealth of information. In this internet age this might seem like going old school, but there are various features by authoritative figures in the industry which provide useful information. The advantage of these television and radio programs is that they break down the complex information to layman language, relating the information to everyday life scenarios.

Reading (again)

After covering the basics and having a firm grasp, the next logical step is to get a more detailed level of understanding. This means looking for more detailed books and websites. Search for the wall street journal’s investment guide, or the value line website for much deeper investment information and advice. Those who make it this far are obviously serious about investment, and might consider making the information search a daily habit. For instance, one should consider subscribing for famous investment magazines and publications like the wall street journal, which gives daily overviews of the nature of the global market.

Speak to experts

At this point, a useful direction to go is to speak to experts, especially in the identified areas of interest. Depending on one’s propensity for risk and their investment portfolio, there are many possible directions one can take with their money. Long term return options are different and often riskier than longer term return options. The choice, of course, depends on individual circumstances.

Strictly speaking, there is no single best investment route. With more hunger for information, one might consider taking a short course at a local institution or at an accredited online company. For instance, the chartered financial analyst, a nonprofit organization, provides particularly useful courses.

The financial services field is always evolving as circumstances change. The bottom line is that the quest for investment information should be a lifelong dream, and not just a one off pursuit. The past few years have seen the emergence of fields that were traditionally not part of the financial sector.

Managed accounts and exchange traded funds have seen unprecedented growth in the past few years. Annuities and insured investment products have also gained prominence. People’s reactions to dynamic environmental conditions and the way they wish to deploy their resources results in change in the financial sector. It is important to remain as up to date as possible and learn the value of clever forecasting. Learning about finance is not easy, but with dedication all is possible.