Buchhaltung is the process of recording, analyzing, and reporting financial information for use in management decisions. It’s a crucial part of modern finance, as investors rely on accurate data, and companies’ executives need transparency to manage risks and plan projects.
Business owners, lenders, employees, managers, and customers all rely on accounting information to make important business decisions. This information helps them determine whether a business is financially healthy and can afford to pay wages and bonuses, invest in new equipment, and hire new staff.
Recording of Business Transactions
Whenever business transactions occur, they need to be recorded in the accounting records. This is done through journal entries that record changes in the accounting equation resulting from these events.
The bookkeeping system of double-entry requires that each transaction is recorded through two different accounts using a system of debit and credit. This will ensure that the total debits equal the total credits and that the accounting equation will always balance.
Cash (regularly a debit balance): This account tracks any cash paid or received for goods and services sold by the business. This includes cash receipts for payment of invoices, payments made to vendors, and any cash paid out by a customer.
Inventory (regularly a debit balance): The company’s raw-goods inventory, ready-to-sell items and work-in-progress items. Physical counts of the inventory should take place periodically to make sure that the accounting records agree with the actual inventory on hand.
When a customer pays you for a sale on credit, you have to record this as a sales transaction in your accounts receivable journal. This can be done manually or in accounting software.
Analysis of Business Transactions
In order to maintain accurate accounting records, businesses must analyze each transaction that occurs. This process is crucial because it allows business owners to understand how transactions impact their company’s finances.
The first step in the analysis of a business transaction is to identify which accounts it affects. This will help you determine whether the change in an account is debit or credit.
For example, if John invests $15,000 in cash to start a landscape business, it increases the cash account and capital account. Likewise, if he purchases a truck with market value of $100,000, it also increases the cash and truck accounts.
The basic accounting equation is Assets = Liabilities + Owner’s Equity, and every economic transaction that your business makes must be classified into the proper categories. This is done by analyzing each transaction and determining how it affects the accounting equation before recording it into your books of accounts. This will ensure that the accounting equation stays in balance after each transaction is recorded.
Preparation of Financial Statements
A small business’s financial statements are a vital part of analyzing the company’s financial position and performance. The income statement, balance sheet and statement of cash flows all give a comprehensive picture of the company’s overall financial health at a given time.
The balance sheet, also known as the statement of financial position, shows an entity’s assets, liabilities and shareholders’ equity at a particular point in time. Assets are classified as current and long-term, while liabilities are listed based on their due dates.
After all adjusting entries have been made in the general journal, all journal entries have been posted to the general ledger and general ledger accounts have been footed, the financial statements can be prepared. It is important to trace the amounts from the adjusted trial balance onto the financial statements in order to produce a complete set of financial statements.
Management Decisions
One of the most challenging tasks in a given management role is the selection of the appropriate courses of action. The best way to accomplish this is to utilize a comprehensive database of information to guide decisions. It is also worthwhile to consider the cost and risk associated with each course of action. The best decisions are those that result in the creation of business value. The resulting success depends on the ability to plan, direct and control resources efficiently and effectively. Fortunately, the aforementioned challenges can be alleviated with some careful research and implementation of the right systems. The end result is that you are able to reap the rewards of good business practices with a minimum of pain. The following are some of the key ingredients to a winning formula: A solid foundation in managerial accounting and an ability to identify, track and evaluate the latest financial and business related news and developments.
