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.