Respond to this in 6 sentences or more.
Accounting is a diary of business. There is three step involved in writing a business journal, and these steps are identifying, recording, and communicating which explains where the company is standing today.
Identifying: First, it is necessary to determine the type of transaction such as Initial investment, expenses, accounts payable, accounts receivable and so on. Second, it is better to spend few minutes every day and record it on a simple Excel spreadsheet. The accountant then takes this information and records in a systematic accounting journal or on a computer using an accounting software. At the end of the month/year, this record will be available for the internal and external users to make a decision. Internal users such as finance, marketing, Human Resources, and Management uses this reports for making different decisions. External users such as investors who like to invest their money for income, creditors the one who provide necessary products on credit. Taxing authority to make sure the business meeting with tax laws. And Customers are interested in company regulations and stands behind their products.
The accounting entries are done using equation.
Basic equation is Asset = Liabilities + Owner’s Equity
Another equation is Assets = Liabilities + Owner’s Capital – Owner’s Drawing + Revenues – Expenses
If business owners do not have time and necessary knowledge, then he/she should hire a professional accountant to do their accounting. All the BO’s needs to provide all the data honestly. Otherwise, it will be an ethical issue, and a penalty for false data report is from small fees to imprisonment.
The recording the business transactions can be tricky, and a user may report at the wrong location in the equation, and that could lead to the false result like profit or loss. My first misunderstanding was about prepaid expenses and unearned income, how it would be recorded.
My suggestion is that daily record all the transactions at the end of the day and provide these transactions to a professional accountant on weekly basis as he can catch any mistake before it is too late to remember. Always use business ethics when reporting-recording all the transactions.