Accounting is the complete system used to keep track of all data, records and transactions. This system can give you reports and information that are important to understand the finance side of a company. The accounting process is also referred as the accounting cycle as each reporting period the accounting process is repeated again.
Payroll is also part of accounting. It includes all financial records of salaries and wages including bonuses and deductions of all employees. In short, payroll is concerned with the amount paid for the work an employee provided during a certain period of time.
Accounting should not be confused with bookkeeping. Bookkeeping is the systematic recording of all transactions of an individual or organization including payments, sales, purchases, income etc. Bookkeepers record financial transactions and accountants create reports and files from those records. Those can then be used by the business owner and government agencies. The key to good accounting is to have an established, well working accounting system which requires the correct input of data. This system needs to be set up by each accountant and has to be suitable for the company or organization.
Basics of Accounting II – terminology
An important part of understanding accounting is to get a grip on the expressions and terminology. The following are the most important accounting terms:
Source documents are the original transaction records. They can be used during audits as prove that particular business transactions indeed occurred. Source documents could be cash receipts, credit card receipts, customer or supplier invoices etc. They should include a description of the transaction or the product name, the date when the transaction took pace and the amount paid.
The general journal keeps track of all business transactions in the accounting system. It includes explanations of the transactions, the affected accounts, and the amount by which those accounts are increased or decreased.
The general journal is not to be confused with the general ledger. While the general journal is a chronological record of transactions, the general ledger is complete collection of the firm’s accounts. The left side of the ledger lists all debit transactions and the right side lists all credit transactions. Therefore general ledger accounts are ‘T’ shaped. Company records however may contain three or four columns in order to display the account balance after each single record.
A trial balance can be used to check the total of the debit balances against the total of the credit balances. If all entries in the general ledger are correct and were properly posted, the sum of debits should equal the sum of credits. If they don’t equal, an error has been made in the process.
Adjusting entries are entries in the general journal made at the end of the accounting period to assign revenue and expenses to the period in which they actually are applicable. Journal entries are based on actual transactions, so the date on which these transactions occur may not be the date required to fulfil the matching principle of accrual accounting. Therefore adjusting entries are required to correct this.
Financial statements can be prepared once all adjusting entries are completed. The necessary information is taken from the ledger accounts. These financial statements often use data from the other statements. Therefore a logical order for the preparation should be followed:
- Income statement
- Statement of retained earnings
- Balance sheet
- Cash flow statement
Closing entries are journal entries made at the end of an accounting period. Then, balances in temporary accounts are transferred to permanent accounts, and in doing so reset the balance of the temporary accounts. These can then begin with zero in the next accounting period.