What is it?
Accounting is the accumulation and organization of information about an entity.
organizes information about money, useful for attracting external investment and assessing the state of the entity. It must be standardized
, or it would be impossible to understand or compare financial reports. (See GAAP
prepares information for the tax authorities. It is legal to have separate books for finances and taxes.
is manager driven to help make decisions about investments, money lending, and employee performance evaluation. There are no standards, and one must rely on the managers to know what they are doing when they choose, for example, to leave out a cost, perhaps because they view it as an investment.
Accounting is inevitably subjective because decisions must be made today on investments whose true cost or profit will not be known until many years in the future when it is actually sold, or when the warranty is expires. Thus investing
requires deep investigation of many factors.
is responsible for classifying and summarizing business transactions
. Repetitive transactions of the same type are recorded in the same account
. All accounts
are collected in a Ledger
. An estimate of financial performance is given by the RetainedEarnings
account. The details of financial performance are given in an IncomeSheet
. There are two approaches:
Management chooses alternate rules from the Generally Accepted Accounting Principles (GAAP)
to make financial statements.
SEC Financial Reports
: Private companies need not file with SEC unless they have public debt.
The fundamental accounting equation is Assets
, and it is central to the balance sheet
, one of several financial statements
The above equation is maintained through every recorded business Transaction
Saylor Accounting Principles I
Principles of Accounting.com