In a Nutshell (II).Finance: Accounting (I)

The dividing line between accounting and finance is blurred. In basic terms accounting is considered to be everything concerned with the process of recording financial events and ensuring that such recordings are in compliance with the prevailing rules. Finance is the area concerned with where the money to run a business actually comes from in order to be accounted for.

The purpose in accounting is:

• to establish what a business owns by way of assets;
• to establish what a business owes by way of liabilities;
• to establish the profitability, or otherwise, at certain time intervals, and how that profit was achieved.

FUNDAMENTALS

Money measurement: In accounting, a record is kept only of the facts that can be expressed in money terms.

Business entity: The accounts are kept for the business itself, the concept states that assets and liabilities are always defined from the business's viewpoint.

Cost concept: Assets are usually entered into the accounts at the cost at date of purchase. For a variety of reasons, the real 'worth' of an asset will probably changeover time. The depreciation is how we show the asset being 'consumed' over its working life. It is simply a bookkeeping record to allow us to allocate some of the cost of an asset to the appropriate time period. The tax authorities do not allow depreciation as a business expense.

Going concern: Accounting reports always assume that a business will continue trading indefinitely into the future – unless there is good evidence to the contrary. This means that the assets of the business are looked at simply as profit generators and not as being available for sale.

Dual aspect: To keep a complete record of any business transaction we need to know both where money came from and what has been done with it.

The realization concept: In accounting, income is usually recognized as having been earned when the goods (or services) are dispatched and the invoice sent out.

The accrual concept: The profit and loss account sets out to 'match' income and expenditure to the appropriate time period. It is only in this way that the profit for the period can be realistically calculated.

Bookkeeping: the way transactions are recorded. The debits in a double-entry system must always equal the credits. If they don't, you know there is an error somewhere.

Cash flow: is looked at in two distinct and important ways: as a projection of future expected cash flows; and as an analysis of where cash came from and went to in an accounting period and the resultant increase or decrease in cash available.