What exactly is accounting? How does it work?
This article is aiming to give you a very quick and dirty (lol) guide to the accounting process. I've talked about accounting being information in my other post here, this post is starting to move onto the how accounting works.
If you’ve got a good basic foundation or framework of understanding of what accounting is and how it works, it will be much easier to build on. This means we’re starting simple, and then will add detail.
The objective of all of this information and advice is NOT to make you into an accountant. I mean, no one wants that! (Well, I assume you don’t want to be an actual accountant as then you should be studying for a professional qualification not just reading my blog… anyway).
The point is, you don’t need to be an expert in accounting in order to be able to use it. But some understanding will mean you can get the most out of what you have, can follow what is happening and ensure your advisors are doing what you want and need them to do.
Obviously if I help you to love accounting so much you want to know EVERYTHING then hit me up. I’ll be very proud :) But in the meantime, none of this constitutes professional advice, it is for educational purposes only. Got it? Great. Onwards....
The primary assumption
Before we talk about the accounting process, I need to mention my *very important* primary assumption. Throughout all of this, I assume that every business has the objective of making a profit for its owners.
If a business isn’t making a profit, then it can’t really continue in operation for a very long period, and probably isn’t really a business. So we are all trying to make at least enough money to keep in business and keep going.
Now, profit is when your income is higher than your expenses. This gives us a basic business model of buying things at one price (the expense) and then selling it for more (the income). Whether the things you are buying and selling are physical goods or services, the ideas are going to be the same, although the detailed execution (which we see later) will be different.
Sooooooo, now we’ve got that out of the way here we go - the accounting process, start to finish!
The accounting process is:
Recording the transactions (this is the raw data) the business is making (the buying and selling of stuff) by writing everything down. I mean, we can’t remember everything we buy and sell, I sometimes forget what I packed for lunch this morning before I even get to lunchtime.
Organising those transactions into logical groups (so everything you buy in one list, everything you sell in another as a minimum). The larger or more complicated your business, the more specific and organised you will want to be here to help you later on.
Then, because we are so awesome, successful and busy, those lists get loooooong. So we total them up to get a total at a glance. This is ‘Summarising’
But knowing just your income or your expenses isn’t actually that useful, we want to look at them together as that is what gives us profit! This is where we bring them into some kind of template / format, in order to present the important information in a way it can be readily understood.
And that’s it. Accounting is the recording, organising, summarising and presentation of a business’s transactions for a period! Easy peasy.
The first three steps can also be referred to as bookkeeping - quite literally the keeping of the books or records of a business.
We will explore the ‘how’ of these different stages in other posts, so check them out for more information.
Still got questions? Send me an email or comment below. Let me know what you’re not sure about and I’ll do my best to answer your queries! I love questions as they help me to ensure I’m explaining the bits you really want explained so get in touch.