The Basics of Accounting

Accounting is the process of systematically recording and communicating financial transaction information. In a business context, this includes tracking assets and liabilities, making a profit and loss statement and cash flow statement, and staying compliant with taxation requirements and financial regulations.

While the average person may have a personal accounting strategy that works for them, a business needs a more complex system of recording and reporting its transactions. This is because businesses have more stakeholders than individuals, which means that more people will be looking at the data and using it for different purposes.

As a result, the data used for reporting on a business’s financial state must be consistent and accurate for all users. These users include internal and external parties. Internal users include departments within a company such as human resources and production, who need to know how profitable the business is in order to set salaries and budgets. External parties include lenders and investors who want to know how well a business is performing and when its debts will come due, as well as government agencies such as the IRS and local taxing authorities who require a company to submit detailed reports regarding its finances.

The accounting process begins with the preparation of a general ledger, which lists all the accounts and their current balances. Then, journal entries are made for each transaction that takes place during a reporting period. Each entry must include three components: when the event took place, what it was for, and how much money came in or went out. Once the adjusting entries are made, an unadjusted trial balance is prepared to test whether all debits and credits match up. At the end of a reporting period, temporary accounts that are measured periodically, such as income and expense accounts are closed and the balance sheet, statement of changes in equity and cash flow statements are prepared. Buchhaltung






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