LESSON 8 - BUSINESS BASICS PART I - BUSINESS TYPES, ETHICS & LAW, ECONOMICS, FINANCE & ACCOUNTING

Accounting and the Accountant

 

Accounting keeps track of the flow of money by keeping financial records of sales, expenses, receipts, and disbursements of cash, including calculating the taxes the company owes.  An accountant’s primary function is to develop and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. They are responsible for preparing financial statements such as the income statement, balance sheets, and cash flows.  Some common responsibilities and controls of the accountant, also sometimes known as the controller, are:

 

·         Accounts Receivable, which tracks the money the company is owed and paid.

 

·         Accounts Payable, which tracks expenditures and authorizes checks to be cut to pay bills to suppliers.

 

·         Payroll, which ensures employees get paid.

 

·         Credit, decides just how much credit will be extended to a customer.  This gives selected customers who are in good standing time to pay, whereas COD (cash on delivery) is for customers who are not in good standing due to late payments, etc.

 

Accountants or bookkeepers use journals or ledgers, sometimes referred to as “the books” or “the books of accounts,” to keep track of all transactions.  These ledgers used to be on specially ruled ledger paper, however, accounting computer software is now more commonly used.  Ledger entries can be made on a daily, weekly, monthly, or quarterly basis.  It is common to have at least three ledgers: cash inflow ledger, cash outflow ledger, and the general ledger.  At the end of the accounting period, the various journals and sub-ledgers are posted into the general ledger.  Some common sub-ledgers are for separate kinds of transactions.  For example, sales transactions in the sales ledger, payroll checks in the payroll ledger, invoice in accounts receivable ledger, and bills received in the accounts payable ledger.  The financial statements we discussed earlier are drawn up from the general ledger. 

 

These journals and ledgers will use a double-entry system.  The two entries will show one debit, which would be an entry on the left hand side of an account, and one credit, which would be an entry on the right hand side of an account.  These two entries offset each other and keep the books in balance:

 

The debit represents:

 

  1. An increase in an asset account.
  2. A decrease in a liability account.
  3. A decrease in a revenue account.
  4. An increase in an expense account.

 

The credit represents:

 

  1. A decrease in an asset account.
  2. An increase in a liability or owners equity account.
  3. An increase in a revenue account.
  4. A decrease in an expense account.

 

 

Once all of the transactions have been recorded and posted to the general ledger, they are then entered into the balance sheet and income statement and summed up.  These are the accounts total or “Net Balances.”

 

The financial statements for publicly held companies require an opinion written by an independent auditor.  The auditor is a CPA (certified public accountant, licensed by the state where they practice) who audited the company’s books and financial statements.  If the CPA’s opinion is approved “without qualification,” then the auditor found the company is in accordance with GAAP.  If the accountant’s opinion is “qualified,” then there was a practice or transaction not in accordance with GAAP, or for another reason to believe the statements do not truly reflect the company’s financial condition.

 

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