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What do you mean by Accounting?

by Bhakti

Accounting can be defined as the creation of financial information. In other words, in accounting, how much money you are making, how much money you are worth, how much money you are spending, where you can improve and make more money, etc. You can know!

Why do you need Accounting?

Consider this scenario.

You run a bakery and bake the best cream cakes in the country. It is world famous and you receive orders for your legendary cakes from all continents

But one night, a fanatic customer who believes you’ve got a magic oven breaks into your bakery and steals it. You go ballistic.

In need of $ 10,000 to buy a new oven. You decide to go to the bank and ask for a loan.

The problem is that I don’t even have an accountant, so I don’t have financial information about the bakery.

The Loan Officer is a pretty woman named Anne. She asks how much you made a profit this year. I guess she doesn’t know. You say it was probably $ 30,000.

She asks you how much your property is worth. You don’t know anything. She asks how much debt you have. I’m confused.

She asks what your cash flow is every month. You don’t even know what meaning Anne says no because you don’t have the financial information.

Now, let’s say you go and find an accountant who prepares some financial records for you. She returns to the bank with the following information: The bank has $ 5,000 in cash.

This year we sold $ 52,000 worth of cakes.

It made a profit of $ 27,000 this year, but over the last three years, it has grown at an average annual rate of 6%.

This year’s operating costs are $ 25,000. The maximum wage is $ 11,000 per year. The next largest is $ 7,500 a year in advertising. The smallest is $ 600 a year in telephone costs.

Your bakery’s net worth is $ 122,000 and you have no debt.

Your bakery’s net cash flow this year was $ 13,000.

Now tell Loan Officer Anne how much money you make, how much money you spend, what you spend, how much you owe, how much you have in the bank, and how much your property is worth. You can tell exactly if there is.

She now has the information, so she can decide to lend you money. She knows how much money you make each month and can be confident that you can repay the loan.

Now, don’t worry if you don’t understand all the flashy terms out there, such as “cash flow” and “net worth”. You will soon learn the meaning.

So why is it important?

  1. Firstly to maintain a systematic record of commerce
  2. Accounting is used to maintain a systematic record of all financial transactions in the books of accounts.
  3. Further more for this reason, all transactions are recorded in the journal in chronological order and then posted to a ledger or other principle book.
  4. Moreover to check profit and loss. Every businessman wants to know the end result of running a business on a regular basis.
  5. In addition you can create an income statement to see if your business is profitable or incurring losses. To judge your financial position
  6. Another important purpose is to determine the financial position of a business to check the value of assets and liabilities.
  7. However for that purpose, we have prepared a “balance sheet”.
  8. Above all to provide information to various users.

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