Business Accounting Explained
Having a good understanding of business accounting is essential to run a successful company. Even with the best products and services and millions of dollars in sales, without knowledge and use of proper business accounting practices your company will fail. Business accounting is the process of creating and maintaining an accurate record of all of a company's income and expenses to interpret its financial position. This process can be handled by hiring an accountant or using online bookkeeping services or a cloud business accounting software like ZarMoney.
Accounting Terms Vocabulary
To understand and use proper accounting practices and processes in your business, you must be familiar with the basic accounting terms and vocabulary. The following are some
of the most common business accounting terms:
- Net Income (NI)
Sometimes called the bottom line, net income is the amount of money a company has after
all operating expenses are subtracted from the income it generates. It can also be called Net Earnings, and it is calculated as sales (revenue) minus cost of goods sold, selling procedures, general and administrative expenses, operating expenses, depreciation, interest on loans, taxes, and other expenses. It is an important number for stakeholders to assess organization's financial health. This number appears on a company's Income Statement and is also an indicator of a company's profitability.
- Income Statement
Also called the Profit and Loss Statement, an Income Statement is a summary of all the revenue, operating expenses, profits and losses of a business during a specified period
of time. It is one of a company’s core financial statements. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.
Also referred to as the Company's Accounts or Accounting Journals, journals are where businesses record all of their transactions as they occur. The data is then transferred to official accounting documents, such as the General Ledger, from which financial statemenets are generated. It’s also known as the book of original entry as it’s the first place where transactions are recorded.
- General Ledger
This is an official accounting document in which every business transaction recorded in the company's journals is organized to chart its accounts and provide a quick, clear
view of the history of a company's accounts. It is also known as a nominal ledger, and it is a bookkeeping ledger that serves as a central repository for accounting data transferred from all subledgers like accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects.
Every account organized by a company is known as a Ledger Account. The collection of all these accounts is then known as the General Ledger. The General Ledger is the backbone of every accounting system.
- Fiscal Year
This is a period of time used by companies for preparing financial statements, closing out their books and providing all financial documents that are required for state and federal tax submittals. The fiscal year and the calendar year are not always aligned. For instance, public school institutions often begin and end their fiscal years according to the school year.
A fiscal year is especially important to publicly-traded corporations and stakeholders since it provides a year-to-year comparison view on financial results. For tax purposes, the Internal Revenue Service (IRS) allows companies to be either calendar-year taxpayers or fiscal-year taxpayers.
- Current Assets
This is a list of cash, inventory, accounts receivable and other resources a company
is likely to use within a year. They represent all the assets of a business that are expected to be sold, consumed, used, or exhausted through standard business operations within one year. Current Assets are an element on a company's Balance Sheet, one of the most important financial statements.
- Non-Current Assets
These are assets like computers, equipment, real estate and vehicles that add value to a company over a period of one or more years. In other words Noncurrent Assets are a company's long-term investments for which the full value will not be realized within the accounting year. Among Noncurrent Assets we can find investments in other companies, intellectual property, and property, plant and equipment. Similarly to Current Assets, Noncurrent Assets appear on a company's balance sheet.
Depreciation is the gradual loss of value of company assets over their lifetime, some of which can be deducted annually on the company's tax returns. In accounting this terms refers to two sides of the same concept: first, the actual decrease of value of an asset, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used (depreciation with the matching principle).
- Trial Balance
This is an activity in which a company uses a worksheet to list its credits and debits to ensure any current balances are accurate. This enables the company to be able to confirm the final figures are correct before they produce their financial statements. In other words, Trial balance is a report that lists the balances of all the accounts to ensure debits and credits are equal.
Forecasting is a process through which companies use their historical financial data in
order to be able to predict the future business trends. Forecasting is often used by businesses when they are trying to calculate their sales, expenses, supply, demand and other resources for an upcoming period of time.
In other words, Business Forecasting refers the technique predicting developments in the company, such as sales, expenditures, and profits. The purpose of Business Forecasting is to develop strategies based on already known information. Data of the past performance is collected and analyzed via quantitative or qualitative models, and patterns are identified direct for demand planning, financial operations, future production, and marketing operations.
By having a good understanding of these common accounting terms, business owners will be better able to navigate the accounting world's intricacies.
Proper Accounting's Role and Importance
Whether you hire an accountant, use an online bookkeeping service, ZarMoney or some other cloud business accounting software, understanding proper accounting's role and importance is crucial. Proper accounting can help you make financial decisions that are best for your company. Using good accounting practices and procedures can reveal the financial course of action that's best suited to your company and can help show the steps you need to take for it to flourish. Using an online bookkeeping service, hiring an accountant or using ZarMoney can make the process easier.
Bookkeeping and Accounting
Bookkeeping and accounting both have the same general purpose, but they are not the same thing. Accounting involves interpreting financial data to provide insight and advice about the current and future financial activities of a company. Bookkeeping primarily involves recording a business' financial transactions accurately, extracting financial information for financial reporting and taxes and analyzing the financial data of a company to determine spending and cost-cutting options and priorities. It's the first step in a company's business organization and its financial planning as well.
Proper Accounting Helps Maintain Accurate Records
Whether you use an online bookkeeping service, or cloud business accounting software or hire an accountant, making sure your business maintains accurate financial records is vital. Proper accounting practices and procedures ensure all revenues and expenses are entered into the company's financial records and you are prepared if your business is audited. It helps you to create accurate income and expenditure summaries and to always be aware of your business' financial state. Plus, accurate accounting can help you better chart the right course for your company.
The General Ledger's Role In Accounting
The General Ledger is a key accounting tool and the epicenter of a business' financial
records. All revenues, expenses and any other of your company's financial transactions
are recorded in it. Accountants use the business ledger as the permanent record of a company's financial progress. The data needed to create profit and loss statements, financial reports, balance sheets and other financial documents come from the general ledger the accountant maintains. Whether you use an accountant, business accounting software or an online bookkeeping service, this data must be accurately documented.
Accountants and accounting systems analyze the information from bookkeeping and ledger entries and all other financial records to create financial reports. Accountants use financial reports to show where a business is making or losing money, the state of its capital investments and where cash flow needs to be improved. A financial report provides an in-depth analysis of all a company's complex financial data in a way that clearly shows where the company stands financially. This is essential to have to make well-informed, accurate, financial decisions that's best for the company.
Business Accounting Software
Many companies find it convenient and cost-effective to do their business accounting using business accounting software. Good business accounting software is fast, easy to use, accurate and can provide the financial reports companies need in a timely manner.