What is accounting? (A simple explanation)

In easy to understand language and in a simple explanation, we answer the question, “what is accounting?”

If you don’t want to read on, here’s a quick video that you can watch that helps explain what accounting is:

Accounting is the system of recording money.

This information is usually related to things that happen when it comes to money.

For example, it could be about recording sales, bills, new purchases, paying employees, pay tax and more.

It’s not only the recording of this information, accounting is also about checking through the information, and trying to get meaning from the numbers, this can be through getting reports and also through examining the data to understand it better.

Let’s look at the basics 3 things that accounting is made up of:

1. Data

In a business, things happen.

The main things that happen are going to be sales and purchases.

We need to record our sales so that we know how much we make. We also need to record our purchases and other types of information.

Accounting is a structure that helps us record this important data we need to help us make better decisions. We record this in…

2. Accounts

When you think about recording information, you need to organise it in different categories right?

Then you separate the recording of when amounts go up and then, when amounts go down.

It’s confusing to record this in one section, but having it in two sections makes it clearer.

So… I introduce you to double entry bookkeeping, it’s a foundation of accounting and utilises a left (debit) and right (credit) side.

Made a sale? I’m going to increase my sale account and then increase my cash account. My sale account is credited and my cash account is debited.

Left and right balances.

3. Labelling/tagging

In accounting, you have accounts but then you need to be able to display results.

There must be a set structure for classifying your accounts so that they appear in the right reports.

Welcome to your profit and loss, balance sheet, cash flow.

So your balance sheet, will only show your asset and liability, and equity accounts, while your profit and loss will show your revenue and expenses account.

Your cash flow statement? Just your cash account.

Accounting often has standards to determine when things are expenses or so that reporting is consistent and people are generally classifying things in the accepted way.

So that’s what accounting is in a nutshell!

Next: The Accounting Equation (with Real Life Examples)

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