So you want to tackle accounting, but you aren’t sure what it entails? Don’t worry, you aren’t alone. Accounting is one of the most misunderstood fields out there, but it’s also one of the most rewarding. There’s a real sense of gratification in knowing that you, yes you, can save a business from impending doom. You can also save yourself from a life of debt. However, in order to reap these rewards, you should get familiar with the following items.
The Disciplines of Accounting: Financial and Managerial
Accounting isn’t just accounting. Contrary to what you see in the movies, accounting doesn’t surmount to one long sheet of paper chalked full of numbers and symbols. It’s all broken down into categories, then divided into two forms: financial and managerial. Managerial forms are used to log all things financial. The financial form is what outsiders like financial institutions will see. The managerial form is painfully long since it has to show the ins and outs of every penny, while the financial form summarizes this information for easy reading. To be a good accountant you definitely need to have a handle on creating detailed and easy to understand managerial forms. To be a great accountant, you should master both.
Accounting Is Based on Two Foundations: Assets & Liabilities
While managerial and financial are the two disciplines of accounting, assets and liabilities are the two foundations. In summary, an asset is what you or your client owns, a liability is what you owe. If your car is paid in full, it’s an asset. If you’re still paying the car loan, it’s a liability. Most loans are liabilities (even if you think of the money itself as an asset). However, some loans double as assets, like a house purchase. Houses can be revamped to increase in value, thus changing from a liability to an asset-liability.
A Ledger Is the Accounting Holy Grail
If you’ve never seen a ledger, you’ve never done accounting. A ledger is a kind of financial graph that contains 5 basic fields: amount deducted (debited), amount added (credited), description, date and balance. Understanding how to keep a ledger is crucial to accounting. There are three types of ledgers that any accountant should be familiar with: General Ledger (tracks liabilities, assets, income, etc.), Sales Ledger (people who made purchases that haven’t been paid in full) and Purchase Ledger (purchases that haven’t been paid).
The Accounting Process Isn’t Written in Stone
There are dozens of programs out there claiming to be “the only program you’ll ever need.” Many accountants fall for this statement and soon realize that ‘the only program’ differs from client to client. To be honest, there isn’t any fail-safe program that can guarantee accurate reports. The reason? Accounting isn’t an exact science. It involves actions that can’t be quantified, like knowing when to strike a customer from the accounts receivable list or ‘estimating’ a cost that wasn’t accurately reported. You’ll also come to know that the tax requirements for each of your clients will differ greatly — even if they’re in the same industry. If there’s room for guessing, there’s room for error — so a good eye for detail and exceptional critical thinking skills are crucial in accounting.
Accounting Software Makes Life Easier
Handwritten records are a must for any accountant, but accounting software is necessary for easy access and safe keeping. Instead of loading everything onto a Disc or flash drive, most accountants use cloud-accessible accounting software. This software allows you to access your books anytime, anywhere (as long as you have a PC and Wi-Fi connectivity). These programs are secure and can only be accessed by authorized individuals with verified login credentials.
Instead of carrying around a ledger book, cash flow records, balance sheets, income statements, etc., from each of your clients, they can log their information directly into these programs. They can also set up their financial accounts to automatically sync. This saves you from chasing down receipts and allows you to have more accuracy in your final report.
If you want to do accounting right, you have to understand that it isn’t as exact as it seems. There’s a lot of educated guesswork involved so you should have some background in business and math. With careful study, practice and of course patience, you’ll be well on your way to being the best accountant on the block.
– For this post, we would like to thank Parker Hansen.