We have too much data and not enough information. I’ve heard this statement numerous times and it’s sure true – especially today. With the Internet, you can be overwhelmed with “stuff” at the click of a mouse. I’m well aware that accounting isn’t everybody’s favorite topic. In fact, it’s a great way to end a conversation at a party – “I’m an accountant and ….” By the way, do you know the difference between an actuary and an accountant? An actuary looks at his or her own shoes when s/he is talking to another person. An accountant looks at the shoes of the person s/he is talking to. That’s what makes them both the life of the party!
Unfortunately, the majority of small businesses that start up will fail. There are several reasons for this. A primary one is that many small business owners don’t have a clue about the financial fundamentals of their business. If you own your own business – and it doesn’t matter how large or small it is – you have to make business decisions. Most of the decisions that you make will be economic in nature. Some examples are how many people you should hire, whether your budget is adequate, whether you should rent or buy office space, which of several investment options best suits your needs and etc. All such questions involve economic alternatives. We live in a world of limited resources. You will frequently have to make choices about how to use your available resources in the most efficient way possible. Your choices can range from the simplest personal decisions involving only a few dollars, to complex business decisions involving hundreds of thousands, or millions, of dollars and affecting many people. The answers to these questions can range from simple to very difficult.
Accounting is one of the most essential elements of business decision-making. The nature and purpose of accounting is to answer your questions and to help you make sound economic decisions. Virtually all important economic decisions depend on accounting information. Accounting is the language of economic activity. Any organization that earns or spends money – regardless of its size or kind – relies on accounting for effective and efficient management. Accounting can supply the information and measurements you need to solve your economic problems. Accounting:
• Summarizes; and
Records – when a business transaction occurs, you have to record the available information.
Classifies – when you record your business transactions, they need to be classified according to the nature of the transaction and the accounts they affect.
Summarizes – businesses – both large and small – can generate large amounts of financial data. You need to summarize your data into a significant form – reports for example – that can be used for specific decision-making purposes.
Interprets – to interpret the results of your accounting information it must be communicated and explained in a way that’s understandable to those who will be relying on it to make decisions.
Finally, don’t confuse bookkeeping with accounting. Many people do. Bookkeeping consists of the day-to-day recording of business data. It’s typically routine and clerical in nature. Generally speaking, bookkeepers only need a basic knowledge of accounting to do their job. In fact, much of the bookkeeping function can be done by computers. On the other hand, accountants must be qualified in analyzing and interpreting complex economic events, providing financial advice, designing systems and business management.
Although accounting may not be of much interest to you, an understanding of the basics may very well mean the difference between your business surviving and thriving … or failing.
Keith C. Macdonald, CA