The Basic Principles of Accounting

University of Michigan professor William Paton defined accounting as a concept with a primary function of facilitating the organization and administration of economic activities in a given company or organization. This means that an economic activity, such as creating a business, needs accounting to be able to administer the income of the newly-established venture. Professor Paton elaborated more on this function of accounting. The function of accounting is further divided two phases that are considered to be closely tied together. These phases include laying out and measuring an economic data; and passing along the results toclients and interested third parties.

Income Statements

One example of using such a function of accounting can be observed in a company's accounting department which periodically evaluates the profits and losses of the company in a monthly, quarterly or annually basis.

These reports are published as the so-called income statement which presents the profits and losses of the company. Included in the income statement are elements like accounts receivable and accounts payable. Accounts receivable means anything that the company expects to obtain from particular avenues, whether in monetary value or others while accounts payable means anything the company is obligated to pay certain entities as in the case of loans. Such concepts accelerated depreciation and retained earning can make the task even more complicated. These entries are usually found in higher levels of accounting.

Bookkeeping in Accounting

Basic bookkeeping is also another principle of accounting, which is an activity recording usual business transaction. It records every transaction that the company partakes down to the simplest and minutest one such as paying bills, owing dimes, spending cents and accumulating dollars.

However, the company owners, whether individual, partners or shareholders are usually more concerned a wrap-up of all transactions entered in the company's financial statement. This type of accounting statement summarizes the company's assets and liabilities. An asset is a valuable quantity to the company and its value is in the cost of the first acquisition of such an asset. Financial statements also document where assets come from because there are certain types of assets that can be obtained through bank loans, which have to be paid in full. Even profits are considered assets to a business.

The financial statement should also summarize the liabilities and this practice is referred to as double-entry bookkeeping. A liability is anything owed to the business. For a business to flourish it should have assets with higher value relative to its liabilities in order to offset the latter. These then show that there is profit in the company. If ever the reverse happens to the business, then this means the company is losing money.

Managing the elements of assets and liabilities is the core of accounting. So you should be informed about the meanings of each element for you to know what to include in the summaries. In addition, there is a set of rules for doing accounting and no company should formulate their own system. It could lead to a chaotic display of results.