Don’t Be Afraid of Numbers: Accounting 101 for Non-Accountants

If mathematics is, according to Galileo, the language in which God has written the universe, then accounting is, according to Warren Buffett, the language of business.

Paolo Quattrone, chairperson of the Accounting, Governance, and Social Innovation at the University of Edinburgh Business School, says the true purpose of accounting is to hold society accountable by making users ask the right questions rather than consume the wrong answers.

Its function, according to the American Institute of Certified Public Accountants, is “to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.” This allows different users to make informed decisions about different courses of action.

While accounting may seem a daunting subject for non-accountants, learning the terms and the kind of information produced is the first step to hurdling this challenge.

Definition of Terms

  • The double-entry accounting system is recognized as the most accurate for businesses of all sizes. This system is based on the idea that every financial transaction that occurs has an equal and opposite effect. Accounting transactions are recorded as either debit and credit, and the two must always be equal and must offset each other.
  • Debit consists of your company’s assets and expenses (including power, wages, rent, or fuel) while credit consists of liabilities and sale. Debits are recorded on the left side of an accounting ledger, while credits are recorded on the right.
  • Assets include equipment, vehicles, bank account in positive balance, accounts receivable, and inventory.
  • Liabilities include loans, accounts payable and bank account in negative balance.

Accounting Information

  • Result of operations: This pertains to the profit generated by the company during a certain span of time. It is measured by deducting all expenses from all income, resulting in what is called net income.
  • Financial position: This tells how much resources the economic entity has (assets), how much it owes third parties (liabilities), and how much is left for the owners after all obligations are paid (capital).
  • Solvency and liquidity: Solvency refers to the entity’s ability to pay obligations when these become due. Liquidity refers to its ability to meet short-term obligations.
  • Financial statements: These are a collection of reports on the company’s financial activities. These highlight the company’s ability to generate cash flow and its capacity to repay its debts. Financial statements consist of three key reports:
  1. Statement of cash flow: This shows the inflows and outflows of cash for operations, investment, and financing activities.
  2. Income statement: This reviews the company’s revenues, expenses, gains, and losses over a specified period.
  3. Balance sheet: This shows the company’s assets, liabilities, and shareholder’s equity over a specified period.

Being able to understand accounting as a language allows stakeholders and parties outside of a business entity – from the owners and investors to creditors, banks, and even government – to make sense of its performance.

To know more about accounting, visit the Higher Heights Training and Events website at at www.higherheights.ph or contact them on the following numbers +63-920-695-4183, +63-915-265-3153, +63-49-302-1944. With its team of trainers and researchers, Higher Heights helps organizations and individuals enhance their businesses and professions through continuous training and seminars.

SOURCES:
https://www.americanexpress.com/us/small-business/openforum/articles/evaluate-your-business-like-warren-buffett-would-1/
https://www.accountingverse.com/accounting-basics/purpose-of-accounting.html
https://www.fool.com/knowledge-center/top-5-financial-concepts-in-accounting-101-for-wik.aspx
https://www.google.com.ph/amp/s/amp.ft.com/content/e0d11ec8-5e7d-11e8-9334-2218e7146b04
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