Accounting 101
The History of Accounting
Accounting originated from the granddads of the number crunch system. Today, calculators are a great use to us, but it never always use to be this way as indicated by the historical stems of accounting below:
“Accountancy’s infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia), when the need to maintain accurate records of the quantities and relative values of agricultural products first arose. This need for record keeping was the synthesis of writing. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. The Islamic Quran also mentions simple accounting for trade and credit arrangements.” – Wikipedia
Basically, are you surprised that accounting dates back this far? If we stop and think for a moment, we realize that man is motivated by trade, money and goods.
The Basics of Accounting
Financial Statements; Cash flow Statement, Balance Sheets, Income Statements and Statement of Retained Earning`s are all vital to the success for a for profit company, as a matter of fact even for a not for profit company.
What is an Income Statement (Statement of Operations)?
An income statement simply is a summary of the firm profitability over a period of time, usually over a year. It presents revenue generated by the firm and expenses the firm has accumulated over the period. The end result is either net income (profit) or net loss.
In business, revenue or revenues (turnover in Europe) is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. As in the case of the firm, it is the using up of assets to generate revenue.
What is a Balance Sheet?
If you remember anything from this note that a balance sheet is a snapshot of the financial condition of the firm at a particular point in time. The balance sheet is a list of the firm’s assets, liabilities and shareholders’ equity.
Assets are the resources or properties held by the company. For example; cash, land, building’s, equipment and supplies.
Liabilities are debts or obligations to the business. If you ever talk to a legal counsel as in bankruptcies they will refer this as the claims against the business assets.
Equity is the owners claim on the business assets, in the case of a corporation it would be the shareholders claim on the businesses assets. Note: Often referred to as NET ASSETS, because if you subtract liabilities to assets, you will come up with the equity of the firm. (Assets-liabilities=equity)
What is a Cash flow Statement?
Cash flow describes sources and uses of cash inflows and outflows of cash. Also, known as the statement of changes in financial position. More importance will be highlighted regarding this statement.
What to look forward to in the future?
Useful ratio’s that are derived from the financial statements, micro and macro economic theory, and Finance and Management.
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Online Accounting Resources
When searching the other day for more complicated theories of goodwill valuation I happened to stumble upon these great sites: